Rich Girl Roundup: We Regret Buying Our House—What Now?

Katie: Welcome back, Rich Girls and Boys, to the Rich Girl Roundup weekly discussion of The Money with Katie Show. I'm your host, Katie Gatti Tassin, and as always, Henah and I are going to dissect an interesting money topic every Monday morning. So before we do that, here's a quick message from the sponsors of this segment.

Before we get into it, you might notice a fun new bonus episode this week in the Money with Katie feed. It's actually a collaboration I did with Fidelity on Alex Lieberman's Fresh Invest, and it's great bonus content if you want a third dose of my voice this week, but if not, our regular episodes are still on their normal cadence. So let's dive in. This week's upcoming main episode is the fun one. It's a bit abstract. It's about the future of money. So think monetary policy, cryptocurrencies' rise and fall, and some of the more, I don't know, ethereal elements of currencies. Why does the US dollar have value beyond the fact that we all agree that it does? So we'll be unpacking questions like those and more on this week's main episode, but in the meantime, onto the Roundup. Henah, how you doing?

Henah: I'm good. How are you feeling?

Katie: I am good. I am pretty into the question this week from Ryan A, so if you would like to read it, do the honors, tell us what we're working with?

Henah: So Ryan wanted to know, "My wife and I recently bought a house and I'm afraid we made a mistake. We did our homework on rent versus buy, but I'm already missing the financial cushion that renting had on our savings and emergency fund. What do we do?" To which I would say that buyer's remorse is real. The question really speaks to a situation that many people find themselves in, I feel like, where the house buying experience is...it ends up costing more than they envisioned by a lot, but they feel like it's something that they had to do or that it was the right step for them, but then they're often considered "house poor," which is kind of a strange term.

Katie: I thought so too, actually. I always thought it should be like you're house rich, but cash poor, like all your money is in the house.

Henah: Maybe that...I don't know. I feel like you're...

Katie: No, you're right. The phrase is house poor, but I always thought that that was kind of a misnomer.

Henah: What strikes me is that the word "poor" implies that you are literally poor. People say, "Don't say that you're poor, you're broke. You don't have..." So to me, house poor is just a strange anomaly of a term. When I saw the question come in, I was curious how many people felt this way. So as usual, your girl went to Reddit, and there were just so many people who had the same question on threads and different subreddits.

Katie: Did anything stick out to you?

Henah: I think I was surprised at how many people pushed back to be like, "No, I would never regret my house. I love it." And I think that that's because we've all been taught to think of having that first house is the American Dream, the thing you're most proud of. Whereas I felt like these people are probably just wanting something to empathize with them. They're already emotionally depleted. They're probably financially depleted. So I was mostly surprised by that.

Katie: So I'm glad that you brought up the subreddits because I think it emphasizes something important, which is that this is a taboo but common experience, which means if you feel this way, it can be very isolating because it's probably universal to some extent. Even if you love the house, there's probably going to be buyer's remorse in some way, shape, or form, even if it's small, and it's not really acceptable to be like, "Yeah, I bought a house and I regret it." Even just psychologically, that can be so painful because it's such a huge expense and you probably did put so much time and energy and money into it that even to admit that to yourself, I think, can be very scary.

Henah: Yeah, absolutely. I was actually reading a few reports that came out "post-pandemic" about how universal that feeling of buyer's remorse is, especially when it came to things missed during the inspection. So even in the Reddit threads, I think a couple of people said that something passed inspection and then later came back to haunt them. So a lot of those kind of gotchas that have become commonplace with housing, it kind of reminds you you can't just be prepared for the down payment. You have to be prepared for major renovations kind of right away.

Katie: So that is something that...and not to get us too off track, but that does kind of freak me out about the inspection process, because I heard that before, that obviously you want to have one that's...legally, you want to make sure that you do that. But I've heard that, that it doesn't really catch the...you might want to get, not necessarily...I mean I'm sure in all cases it's a third party, but that there are things that it's probably not going to find for you that are going to end up being expensive. So you can't think like, "Oh, I got the inspection and everything was up to snuff. It's fine." Not necessarily, which is a really scary element of buying a home.

Henah: But even then it's how do you check a 2,000 square foot home for every possible thing that could be wrong with it?

Katie: You can't.

Henah: And you just kind of can't. But I did talk to my mom, who's a realtor, and she shared that there is something you can look into if you're in the buying process and are starting to regret things or are worried about inspections. She said federal law allows for you to cancel certain types of loans within three business days of signing, which is called the...I believe it's called the right of rescission. And then you could also look into contingencies in your contract, which is pretty common, but just in case any issues pop up over a certain amount of time. So that's something else to consider.

Katie: There was an excellent Anne Helen Petersen article that just came out and I think it's called something like "How Our Homes Make us Miserable." She's a homeowner and she was joking about how, she's like, the other day I started a sentence with, "I was up late last night worrying about our drainage," and she was like, "I can't believe this is my life." But her whole thing was just that homes are so vulnerable, they're vulnerable to the elements, to something in the town changing and suddenly the value changes, to the people and animals that live in and around them, and we're not really conditioned to think of them in that way. And so she said it's a theoretically appreciating asset, but it's only "appreciating" if you are maintaining it, and that takes time and money, right?

Henah: Yeah, 100%. I think the other thing to keep in mind too, budget-wise, is Ryan was asking about that financial cash cushion, is the property value and how rapidly that could change. We have friends who moved into their home and then immediately after, their property value got reassessed when other folks near them did it, and they ended up paying so much more in property taxes because of it. And if you're already straddling how much you can afford, that is a huge dent that you now have to take on and there's not really anything you could do about it. It's not like a repair that you can just say, "Oh, hold off."

Katie: And I mean you can appeal property tax increases, but there's obviously no...you have to have data that makes your case. You can't just be like, "I don't want to pay more, so I'm not doing it."

Henah: Okay. So those are some of the issues that can pop up money-wise. What are the options then for somebody?

Katie: A few things come to mind. So I know, Henah, when we had riffed on this ahead of time, you had mentioned, "Oh, is it possible that they could just wait out a year or two and then sell without capital gains taxes?" But I think the solution here might actually be the opposite, which is that rather than looking for a way to sell quickly, which likely will be a pretty substantial net loss, if all your costs are factored in, just because of how expensive it is to buy a home, just to complete that transaction and the interest that you've been paying on the loan, you're basically not paying for any equity in the beginning if you've got that high rate.

I would probably want to dig a little bit deeper to understand, is the regret purely about the financial cushion? Because if you actually like the house, you like the location, but it's like, "Man, I just really miss having that extra money, that buffer every month and not having these repairs," I imagine the rent versus buy calculus, typically it's more expensive to own in the short term in a lot of cases, but more expensive to rent in the long term. So theoretically, if you do like the house, if you can wait out that initial short-term pain over time, it's likely that the fixed monthly payments you have are going to start to feel more manageable, while theoretically the rents around you are going to keep rising.

Now how long it takes for the rents to surpass your monthly payments will vary substantially based on a lot of factors like the rent to buy ratio in your area, whether or not you purchased a home that was significantly nicer than what you were renting or significantly larger, just an all-around expensive place. But I would bet if I had to kind of throw a dart at the wall, that between years five and seven, you're probably going to start to feel a lot better about it because at that point you're probably going to see the rents more likely catching up to or surpassing what you're paying.

Henah: How did you land on years five and seven?

Katie: I'm just guessing on the five to seven years because in my own comparisons, those tended to be the timelines where okay, year seven, that's when the rent in this area is going to have surpassed the monthly payment that I'm agreeing to now. But that is a timeline that I would often check when making the decision to be like, "How long do I have to live in this house in order for it to make more sense than renting for it to cost net less than renting?" But if you don't like the house, I think renting it out can be an option, but that is harder to make work these days.

Henah: Okay. You're saying it's harder to make work. Tell me about that.

Katie: Prices, I think right now, are generally higher than rents in a lot of markets. So that is to say, it's unlikely you'll be able to rent it out for more than your monthly payment. And I would say too, even if you're not renting out the home entirely and moving somewhere else, if you are really just trying to lessen the financial pain in the short term, you could always get a roommate that lives in the home with you, like rent out a room in the house to someone. I have a few friends that do that that for $700 or $800 a month will rent out a room in their home and it helps defray some of the costs. Of course, run the numbers just in case you might be pleasantly surprised. But I think thinking about it like a long-term choice in that reframe of where maybe you're suffering and sacrificing a little bit now so that "15 years from now you" has a fixed shelter cost, that might help.

Henah: Well, what if you're in the bucket of someone who you're not someone who loved this location or you're not someone who loved this house, so you realized, "I really wanted morning light even though I thought after..." whatever it was, whatever your nonnegotiables are, what do you do then?

Katie: So I think if you realize that maybe this was truly just a flat-out mistake, truly like a, "Okay, no, the area where I bought it is net cheaper to rent in the long term," or, "I just really do not want to stay in this house," because those regions do exist, those homes do exist. That can happen to people. It happens all the time. So you may want to just keep an eye on comps in your area and determine a break-even point. So by that I mean, what are the houses around you selling for and keeping an eye on the market to see, okay, you can calculate your break-even point, you can calculate how much the home has to appreciate, or the number you would have to sell for to get to net-zero again or close to net-zero, and we did a rent versus buy episode a couple of months ago that digs into that explanation of how you find that number.

Then you can basically sell as soon as you think you're going to get that amount and go back to renting. That is, of course, if you want to make sure you're not selling at a loss. If you're willing to take the financial loss, well then, to Henah's point, you probably want to wait a little bit because it still might look like a cap gain on paper depending on the price the home sells for, and you do not want to owe capital gains on that money and make the loss worse. But I do think that there's a short, medium, and long-term solution.

Henah: Can I ask a clarifying question? So just to confirm, if someone says, "Great, I basically lost all my down payment in this, so I'm not going to have a new cash cushion to start building again," they have no choice but to go back to renting?

Katie: Well, no. If they're at net-zero, that means they're back where they started, which is with the same amount of cash in hand.

Henah: So they do have the same down payment.

Katie: Theoretically. So let's say you had a $500,000 home that you bought, but your all-in costs after those two years with all the cash you've put into it, maybe between down payment...I'm going to guess that after those two years, you'd probably have to sell for $560k or $570k to make back all the money that you put in and also pay back the loan. So after those two years, if you can get to the point where, okay, you now no longer owe capital gains taxes on the "profits" that are really more you just breaking even with the amount of recoverable and recoverable costs that you've put in, you've paid back your loan, it's like you're starting from scratch and it's like owning the home never happened.

You're getting out all the money that got put in and you have net-zero shelter costs for the previous two years, assuming it appreciated to that point at the end of year two. Now that's a big guess, but then you kind of have a choice to make. You can either begin renting again if you decide that you actually just preferred that method of consuming housing, or you could buy something else now knowing what you know about why that house maybe wasn't a fit. That's what I mean when I say getting back to net-zero; it's almost like pretending it never happened. You're just back to square one. It's like you never bought the home.

Henah: Okay. So to confirm, if they sell at the end of year two, they don't need to pay back all of the interest for the rest of the loan, correct?

Katie: You are just paying back whatever principal you owe.

Henah: Gotcha.

Katie: So you're paying the interest and amortizing it such that the interest is coming first in the loan or it's a curve that slopes downward. But if you in year two decided, "I want to sell," you have to then pay back the rest of the loan, but they're not calculating and adding on the rest of the interest.

Henah: So to recap, your options are essentially to really think about if the cash cushion is the issue or if there's other issues at play, figuring out if you can wait five to seven years when you kind of hit that point where you may not be as strapped and you might have rebuilt that cash cushion. And then the kind of last piece is if you don't like it, you can potentially rent it out or rent a room out as a way to defray costs, but that's not always going to be a slam dunk. So you do have to run the math for yourself, and then long-term if you really decide you don't want to live there, you could then try to sell it and see if you hit that break-even point.

Katie: Yeah, and it's important to remember that had you been renting for that entire time too, it still would've been a net outflow. So even to say breaking even at zero, it's like, well, renting during that time wouldn't technically have been breaking even either. So as long as it's at less of a loss than your cost of renting would've been, it's kind of like it never happened, or it's kind of the exact same financially, so...

Henah: Those are my favorite kind of financial mistakes.

Katie: The ones that you can just erase. I mean, but it is stressful and it is emotional. I fully...I mean I've never ever bought something that expensive, and it's a huge, huge decision. So you gotta be gentle with yourself that you're doing the best you can and you're honestly probably subjected to a lot of real estate porn, a lot of real estate propaganda, and they sweep a lot of the bad stuff under the rug. So if you do it for the first time and you're like, "Oh my god, this is not what I thought I was signing up for," A, you're not alone, and B, it's not an irreversible decision. It just might take some time to unwind and it's a lesson that you're going to be able to walk away with and make a different decision next time.

Henah: Amen.

Katie: All right, well, that is all for this week's Rich Girl Roundup. We'll see you on Wednesday to talk about the future of money. Bye.

Henah: Bye.