Anything you can buy that is unaffordable is likely to become a metaphorical financial land mine that blows up your finances. For men, unaffordable spending is commonly cars, boats, and big TVs; for women, this is commonly shoes, clothing, and vacations. But, in my opinion, there is one spending weakness that tops them all – and this is the grand purchase of an unaffordable dream home. Dream-home syndrome is when you ignore financial reality and get yourself into an unaffordable, or barely affordable, dream home that ends up becoming a nightmare.
While dream-home syndrome may strike anyone, I see it most commonly in people in the real-estate professions that are in continual contact with higher-end homes. The more you visit spectacular homes, the more you become convinced that you should have one too. However it comes about, once the words “dream home” enter your vocabulary – watch out. This loaded term permits people to ignore and override affordability because, after all, this is a dream home and therefore no expense should be spared.
If you can easily afford your dream home, this is no problem. But when it comes to real estate, the sky is the limit for the price of the lot and the remodel, which can blow through even the highest budget. Some people want the prestigious zip code, street name, water view, while others just want the spectacular home itself. Dream home syndrome even applies to a small starter home – if you simply cannot afford it and your salary is not leaping upward.
A few nightmare scenarios that I am acquainted:
- Someone bought their dream home in the upscale part of town and then remodeled most of it. Even though they had no drop in income, they lost the home to foreclosure within four years. A lifetime of savings from frugality went up in smoke.
- Someone made around $1 million in capital gains by selling their home near New York City. They didn’t plan on it, but ended up spending twice that amount to purchase and remodel their dream home. Only after it was too late, did they realize that the cost to finish the project will push their retirement date back at least 5 more years.
- A couple, each earning over $250,000, built their huge customized dream home at a cost that was far more than what they could afford. But, before they could move in, they were transferred across the country and had to sell it. There were so many quirky elements to the home (a see-through floor in a hallway?) that they had to take a large loss to sell it. So this couple is in their early 60s with no retirement savings, no money, and are paying for a monstrous debt on a home they never lived in. They have already conceded that they can never retire. And yes, these are financial professionals!
I have many, many more examples, but you get the point. What are some symptoms of dream-home syndrome?
- House hunting when you don’t have the money or a planned-out budget
- Continuing to house hunt even though you just bought a home
- Wanting to mimic a friend’s spectacular new home or fabulous remodel
- Continue making additions to the list of features for your dream home
- Failing to consider all of the costs to maintain your dream home
Let me end with a counter example. A friend of mine lives in Nevada. In the real estate boom before 2007, several of his friends and neighbors moved to bigger homes with much larger mortgages. His wife pleaded for them to get a bigger home as well but he refused to upgrade and wouldn’t budge. Five years later, those friends were losing those larger homes to foreclosure, going through bankruptcy, and sometimes divorce. In the meantime, my prudent friend paid off his mortgage and considered buying one of those upscale homes at half the price that his friends bought at the real estate price peak. Everything you purchase must be affordable or, sooner or later, it will be taken from you. The term “Dream Home” should fire off red alarms that your financial life may be in peril if you move forward without a thoughtful and sustainable budget.