David Kim

Baldeep, I bought my 2 family home in Lodi last year after seeing prices come back to reality. It is a newer (2005) built ~2600 sqft home w/ 2 car attached garage for just under $400k. Similar comparables (newer 2 family homes in the same style) this year are SELLING for $420 to $450k while non-short sale listings are still ASKING around $500-550k, but not selling.

Compared to other towns in the Bergen Passaic and even Hudson county areas, this is a bargain. The caveat is that there is a higher tax rate (2.9%) compared to other towns in the area. Just like everyone else mentioned, this is a comparison to nearby towns. Lodi is convenient to trains and buses to New York City, there are onramps to the I80, Rt. 17 and 46, and close to Rt. 21. There are many shopping centers and just 5-8 miles south of the largest mall in the area. Although the schools are below average for Bergen County, it is well above average for the entire state of NJ.

There are many construction projects going on in Lodi to beautify, repair, and replace condemned buildings, roads, and various infrastructure. There are some flood zone areas, but most of Lodi is flood zone free. My particular area is flood free as well.

Regardless of what town you are looking at, the homes are worth what people are willing to pay for them, not what the sellers are asking for. For example, the same homes I mentioned before were selling for $650k+ in 2005/2006. I still see listings for comparables for up to $600k, but they have been sitting idle in the MLS for a year or so. Those who lower their prices to a reasonable level get the homes sold. To explain reasonable levels, in 2002/2003 (pre-bubble), the same comp homes would sell for around $375-450k.

For your reference, in these 2 family homes, rentals for the 3 BR unit is $1800-$2000 and the 2BR lower unit is around $1200-1400. I won't go into various appraisal methods/investment formulas, but this should be a good reference for you:

Assuming your bank allows you to include the rental of the ground floor 2BR unit, that would be the equivilant of $200k worth of loans @ 6%/30yrConv. Assuming you put 25% down on a $400k home(easy number to use), you would have a net payment of $600 ($100k @ 6%). But PLEASE do not forget the TAXES and insurance, which many forget when doing the math. This comes out to about $1150 a month ($13000/yr in taxes and ~$600-800/yr in ins.). Now your net payment is around $1750, minus income tax savings (talk to your accountant for your situation).

From the math above, you can see something in the mid-$400k range is about the breaking point of rent vs. buy (once again, NOT including tax benefits). This makes the home prices REASONABLE.

Now, when you do the same math on a single family home, a newer/renovated 3BR 2 Bath home would go for around $400-500k. Rentals on these would be slightly higher at $2000-2500. Taxes are around $12-14k. Doing the same math of $400k home value, 25% down, that leaves a 300k loan. @6%/30yrConv the payments would be around $1800/mt + $1100 in taxes/insurance. Now you're looking at $2900/mt net payments, EXCLUDING tax benefits. For most, the benefits would be around ~25% of the net (since most of the loan payments is interest). That brings the NET net payments down to ~$2200. This makes the decision purely an emotional one as the numbers are virtually even.

For any neighborhood you look into, check the rental value of the home (whether a single family, apartment, or multi unit place). This would be the number you should compare to when figuring out if it's "too much" to buy. I always walk my customers through this analysis and lost many deals in the "boom" market. I did earn their respect and hope to get their business in the future when the numbers do make sense for them.

Granted, there are a few that I did sell, but only for those who had other reasons why they were willing to own rather than rent. This includes a very favorable tax situation, a commitment to live in the home for 20+ years and not concerned about short term pricing, and the inability to find what they were looking for in a rental. In all of these situations, the clients were very well off and weren't close to worrying about a debt/income ratio issue.

I hope this helps you understand what warrants a house to be "overpriced" vs. appropriate. Just remember, the prices you see listed are just ASKING prices. You'll be amazed what you can offer and get accepted so long as you're a qualified buyer and respectful in your offer letter. - Wed Sep 2 2009, 18:21