How to Buy a Home Without the Use of Credit
Ok we’ll start with tackling real estate. But lets get some general facts out the way first before we begin.
We’ll use a typical CA situation where someone is taking out a loan for a house lets say worth 400k. The borrower really cant afford that much house but the bank approved them for it so they decide not to resist the temptation and go for it. In addition, they are taking out the loan in full awareness that they will not be living in this home for over 10 years. In most cases, they have sold themselves the California dream of “buying” something, sitting on it and watching it increase DRAMATICALLY in value. Now in all fairness, this DID happen between 2002 and 2006. However, I dont think I need to tell you that the world soon realized those profits were “phantom profits”, meaning they were propped up artificially based on extreme leverage. Basically, those home values were never supposed to and most likely NEVER WILL rise like that again in the foreseeable future. In addition, most of the people who experienced these dramatic rises in their property values never got out of the game..thus sticking around to the absolute end and going down in flames. Why? Greed for one. But for the most part it is extremely hard and against human nature to get out of something that is making you large amounts of money …even if the money never really existed. Now that we are all on the same page, lets continue to the specifics.
What they WANT you to do.
Most CA homeowners get tired of their homes within 3 years then end up selling their homes after 5 years. So now lets say a loan has now been drawn on the home for $400k. Since this is post real estate collapse, the borrower is now required to come up with the full 20 percent down (80k), pay the usual closing costs (lets say $10k). If their credit isn’t perfect they’ll likely try to pay points to get their interest rate lower to somewhere near 5% and that may cost them more in fees (another $4400). Next they may have to come up with 1.25% for property taxes (another 5k), along with a whole host of other potential fees like pre-paid mortgage insurance premiums etc. But so we don’t get too complex, we will add only these numbers for now. By doing so, we realize they will need $99,400 just to get INTO the house and a monthly payment of about $1900 to maintain it. Granted the 80k in down payment does go towards the principal on the house but as I will soon be showing you, none of that matters when the bank comes and takes that bad boy from you. Why? Because society has taught us that this is called “homeownership” when in fact its LOAN ownership. Don’t nobody own that house but the bank for the next 30 years….and let yourself slip up…they will be quick to remind you. So basically, now the borrower just came up with about 100grand that they could have been earning interest on just to move into a place they don’t even own. Same page? Great, lets move on.
The borrower has now been living in the house for 5 years and decides they either don’t like CA anymore have been running into financial trouble and its time to sell. Lets look at where they are number’s wise. The borrower has been paying $1900 a month for 60 months (5 years) which means they have paid out a total of $114,000 to the bank. Lets add in annual property taxes which on this house, $25,000 total over 5 years. Then lets not forget the joys of “home ownership” and having to pay for your own repairs or upgrades. Lets say this on average is an additional $3500 a year or about $17,500 total. HOA must now be paid every month at $250/month or a total of $15,000 over 5 years. And we wont even get into furnishing costs for a large home, design, the higher price for utilities or typical late fees if you slip up and pay your loan late or property taxes late. But none of that has shit on this cuz here’s the kicker. The borrower has finally started to pay attention to the fine print on their statements and realizes that for the first 7 years of many loans, all you are doing really is paying INTEREST…LITTLE PRINCIPAL. Lets total this up…$171,500 for five years of living in something they again…don’t own. Lets add this to the 100k they initially had to put up just to start this process and also we’ll realize the only way they had been affording this house recently was from opening and using lots and lots of credit products. All of this added together leaves our grand total at $271,500….simply for the possibility of loan ownership for 5 years.
So they decide to sell it. We will be generous and say the home appreciated in value $15k a year or about $75k in total for the 5 years. This brings the total value of the home to $475k. Barring any MAJOR repairs needed to the property, the seller must now come up with 3percent of the home’s value to pay the real estate agent …this equals $14,250. Lets again factor in closing costs and moving expenses…12k. Now when the home is sold for the full $475k and your expenses for selling come out to be 26k that means you have $449,000 to present to the bank and clear up any difference in amounts owed. The 449k minus the $320k you still owe the bank means that’s $129k for you to pocket right? Well that’s all people will tell you when they brag of their sales. Hopefully you are with me because this is where it gets important. Lets remember something, they are in debt. Remember that $271,500 grand total that they had paid for “loan ownership” we just recently discussed? If you subtract the $271,500 from the 80k they originally put down then minus that from the $129k they got back from the home sale, that leaves them with a NEGATIVE $62,500 that they are STILL IN DEBT for. Or in essence, they did all of that for what they thought was an investment and still ended up $62,500 in debt. And this was one of the less vicious stories/examples we’ve seen recently.
What they DONT want you to do.
Now lets look at a quick example of what life would have been like if this had been done without credit. Remember, you pay a premium for ease and the method I’m about to describe was NEVER meant to be easy. It was meant to keep you out of the above scenario, keep you free from bondage and allow you to prosper. Here we go:
The same homeowner asks themselves “how long do I really think I’ll want to live in this house?”. They conclude 5 years max. Then, remembering from the first example (lets say the homeowner had recently learned from a friend’s personal experience) they realize that its probably better to start small on their first home purchase and they also understand there is a high probability they will get tired of whatever purchase anyways. They then decide to profit off of another’s misfortune and acquire a foreclosure (or shortsale). They decide to start small with a condo that just became available as a distressed sale and was way below market value at $120k (it could be in an underdeveloped part of CA or even in another state). Also, the homeowner had been extremely disciplined and had already been saving/investing 2grand/month for the last 60 months (five years). Assuming an 18% appreciation like in the first scenario with the home loan, the condo generates a return in 5 years of an additional $22k. Now remember, since the homeowner had been living way below their means and was saving 2k a month, they are buying the condo outright in cash. This means they are paying ZERO mortgage and for the next 5 years they are still able to save the 2k/month just like before. Also remember, since there is no loan, there are no mortgage rules, no mortgage interest, there is no paying down interest points, no credit checks, no need to pay off debt to show a proper debt/income ratio and there is no need to get in over their heads with credit cards. All of this while currently living free of a monthly payment.
Nevertheless, they decide to sell the condo. There was however, still property taxes ($1,500/year or $7500 for the 5 year duration) to deal with, Home Owners Association dues $125/month ($7500 for the 5 years), closing costs for the buy along with the sale ($5000 total), 3% for Agent’s commission ($3600) and lite maintenance (since they started off in a smaller place its $5000 for the 5yr duration). All of this adds up to $26,100. Also, assuming an 18% appreciation like in the first scenario with the home loan, the condo generates a return in 5 years of an additional $22. Subtracting the $22k from the $26,100 leaves only $4100 it cost them to live for FIVE YEARS….in their OWN HOUSE.
The homeowner completes the sale for $144k. and subtracts the $4100 in leftover fees to leave them with about 140k in proceeds from the sale. Now lastly, we won’t forget about the 2k/ month they were still saving while living there which added up to be another 120kover the 5 year period. This gives the recent home owner a grand total networth of $260k. They also have no debt and are ready to buy the next foreclosure in cash and repeat the process with each step up generating more of a return.
I assure you, this is possible and is being done in many parts of the world where they werent raised on a debt dependance. With a little work and discipline, this could be you.
(FYI- you could still come up with the same type of numbers if you used the 120k condo to get a loan…it still ends in more interest paid, uneccessary temptation to take out a higher loan amount than need, potential debt hazards and more regulations you have to follow)
How to Buy a Car Without Using Credit/The Truth About Financing vs Leasing
Most people trying to obtain a car in CA are in a different predicament than people in many other parts of the country. Californians tend to go through cars and “Trade up” more frequently than the non flashy and non hollywood states across the US. I have to stress to you, this is EXTREMELY important to factor in when you’re making your car purchasing decisions.
Now that we got that out of the way, i’m going to say something that will probably mess you up and distort your imput/output carrier signals. If you are paying on a car, and you keep it under 5 years, no matter if you are financing it or leasing it, every single one of you is leasing. What? Not possible. Yes. Let me explain.
Johnathan has just walked into the local Ford dealership and decides to finance a brand new 2010 Ford Mustang V6 automatic. The sticker price on the window says 22k. John decides to allow one of the salemen to take him into his office and discuss numbers. John has already done his own calculations on what he can afford, undertands that he has great credit and decides to aim for a monthly payment of about $400/month and nothing down. While in the office, John and the salesman go back and forth on accessory additions, taxes, warranty,loan term and downpayment until John is presented with a monthly payment of $500/month for 48months…nothing down. John gives in and the salesman goes to his finance manager to try and get John approved for financing. The snake salesman then comes back and informs John that they’ve run his credit and according to ford lenders, he doesnt qualify for tier 1 financing at 3% (normally a lie). The only monthly payment they could offer is based on a 7% loan at $586/month unless he wanted to come up with a large downpament. (As an FYI-the more cash they can get you to come up with upfront.. the bigger the bonus for the salesperson). The $586 a month brings the total cost of the Mustang to $28,160 for the full 48 months he will be paying on it. Knowing he loves this Mustang but also that he doesnt have money for a downpayment, John agrees, signs the paperwork and takes home the bank’s new car. (yes you read that right)
Fast forward to the end of John’s 4th year in his loan where he has decided to trade up and get something else more matching of where he thinks he is currrently in his life. However, before he sells it, he decides to do the math. Ontop of the $28,160 John paid to outright own it over 4 years, he factors in an average depreciation rate of about 15% of the cars value each year. This shows that the car depreciated $8489.25 over 4 years and is now worth only $13510.75. After that, he once again takes the total cost he paid (28,160k) and subtracts how much the car is now worth ($13510.75). He then realizes he just spent $14,649.25 in four years to drive the bank’s car. And no he really doesnt “own anything” because the rate in which he switches out his car, he has just paid the financing company $586/month to rent a car.
He then begins to wonder what the numbers would have been like if he had leased straight out. When leasing, the number one mistake most people make is trying to base what monthly payment they want SOLELY off the cars sticker price. In all actuality, the amount you pay in a lease is based on how much the car depreciates (goes down) in value at the end of whatever term you’re looking at.
Lets say the Mustang John wanted had a sticker price of 22k and was expected to drop in value to $13, 510 (its residual value) at the end of four years. Subtracting the sticker price from the estimated 4 year value leaves you again with the -$8489.25 in depreciation. If you divide the $8,489.25 the car lost in value by the lease term (48 months), John’s base payment should be $176.85. Now factor in interest and taxes, you get about an additional $150 and giving you a total of $326.85 per month. We’re also basing this off placing nothing down so we dont make the scenerio too complex. The monthly payments equal a total of $15,688 he would have paid to the leasing company to drive the car for 48 months. He then factors in possible lease-end fees such as excess mileage, dings and other body damage and gets an additional $1,500 thus bringing his grand total to now $17,188.
So now most people would look at that and say, oh 17k to lease when the car cost 22k to buy? I should just finance the car outright! Where their mistake lies is not factoring in the true total cost of financing with interest ($28,100) and depreciation of the car once you own it (-$8489.25). Remember, it cost John $14,649.25 total (after subtracting deprecation) to finance the car for 48 months. Now on the other hand, with the lease option, it costs $17,188 for 48 months leaving a difference of $2,538.75 that the person who financed the car wouldn’t have had to pay. But still, why would you pay $2,538.75 MORE to LEASE? Well besides the fact that you are freeing up more of your cash everymonth to spend on other bills ($586 car payment vs a $326 lease payment) this is what it boils down to. You are about to awake and realize Tyler Durden doesnt really exist and was a figment of your imagination all along (Fight Club). This is the most important part of all so please pay attention.
Thats right. You NEVER would lease a damn Mustang. The secret to leasing is to understand all you are really paying for is how much the car is estimated to lose value. The more the car you are leasing is expected to go down in value, the more you will pay due to depreciation of its value. For example, if you are leasing a Hyundai with a terrible resale value, you could potentially be paying twice as much than you would have for leasing something that holds its value much better like say a BMW. THIS is why if you check the employee parking lot at the Ford dealership, the jackass who would have sold you the lease on a 22k mustang (which is expected to lose a third of its value in 4 years), is secretly driving an Infiniti G37 coupe. But he’s leasing the Infiniti for the SAME cost of John’s Mustang monthly payments. This is because even though the Infiniti is 15k more expensive in its sticker price, its still only set to lose about about 8k from its value in 4 years. Yes…the same 8k your Mustang is going to lose.
Lets pause here for a minute. I want you to seriously ask yourself…if a car company made more money on consumers from leasing than from financing…why would they only reserve leasing for those with above average credit? If leasing was such a scam, in CA, wouldn’t these car companies’ M.O. be to push leasing programs to every family in Compton? Ahhh…now you understand why. They want you to keep believing its a scam. Besides buying in cash, leasing is the only other way to come close to beating the system. THIS is why when all of the trucks and SUVs that people bought lost half their value last year as gas prices skyrocketed, the first thing these companies did was suspend their leasing programs. All of the people paying a set depreciation value were benefitting tremendously while people who actually financed these trucks were stuck with an automobile that now depreciated twice as much as had been foreseen. All the people had to do who had leases was give the cars back free and clear at the end of their term. Those that were financing were stuck. Lets also not forget leasing is a tax write off for these wealthy business owners.
Ofcourse we could go into how the person leasing has to worry about mileage, dents and dings to the car’s body, and how if you are a serial leaser, you will never own anything. Also if you ARE disciplined in keeping your car for close to 10 years, financing ofcourse beats leasing. But we are talking about knowing yourself and being honest. So if you are constantly preaching car ownership yet you really fall into the constantly upgrading your car category, do not try and kid yourself any longer about leasing.
NOW WITH THAT BEING SAID, BOTH OF THESE METHODS ARE STILL REFUCKINGSTUPID AT THE END OF THE DAY.
Why are we continually investing in things that depreciate in value while we pay all sorts of interest, fees, high insurance premiums and even deluxe car washes?? Why would anyone need a car that costs over 10grand or if you want to push it, 15 grand?? But if you HAVE to buy something like a 22k Mustang that is depreciating in value every second of the day, the only real way to play the game and take it for what its worth is to buy a car in cash. This isnt even going to be long or complex at all. Why? Because complexity is set up to cost you money so you get confused. Buying in cash is simple. Heres how he could have done it (even though in reality you would be better off doing this on a MUCH less expensive car. We are keeping the examples equal to be fair).
John walks into the Ford dealership with 22k cash and looks at the sticker price on the Mustang. He had been using a combination of sacrificing, working extremely close to home and utilizing public transportation or ride sharing to save the 22k over the last 3 years. Knowing how hard he worked for this 22k he starts thinking to himself “do I really want to do it this way because as soon as I drive this car off the lot it will lose about 20 percent of its value?”. So again just like the example with real estate, John decides to profit off of someone elses f*ck up and then promptly walks out. He looks in the paper and online for people who got into hard times and are deciding to sell their car after only 2 years of driving it. The same 22k car with pretty much the same body style is now available to him for $17600 cash from a private party (20 percent off of the 22k the car cost from a dealer). He then takes 17,600 and buys the car outright, leaving $4400 in savings.
We now have to factor in the time value of money. Lets say in a typical situation, he could have been earning 3% interest on that 17,600. That equals $2112 in interest he could have earned at the end of 4 years. He adds that as a cost onto the $17,600 giving him a total car cost of $19712. Yes the car still depreciates at the same rate of 15 percent a year for 4 years. However, not only does he have the option to sell it before a typical loan term would have ended without being upside down in a loan, he also just saved over 8 GRAND (the 28,100 it woulda cost in financing minus the $19,712 total it cost to buy in cash). With that 8k he saved, he now has the option to invest it, use it as emergency money, let it grow slowly in a high yielding savings account or atleast benefit from never having to worry about the bank repossesing his car . Any questions?
(FYI- the Mustang was used just for an example so I could show how someone’s affinity for a car can influence bad decision making. I would never condone buying a car that costs over 10k again…ever. Everything else just boils down to the same thing at the end of the day..wheels, seats and paint. If you REALLY think you need a luxury car then lease it)