A new feature in building-association work has recently been put into practice. The association will buy for cash a house and lot, or buy a lot and build a house thereon, and sell at a fair price to the member whose application is accepted. Where the house and lot are bought at a cash price, it is usual to charge a ten per cent bonus when selling it on time to a member. The purchaser then completes the transaction by securing the purchase money to the association, the same as in case of a loan on any other property, except that instead of a deed from the association he will receive a lease, with an agreement to sell and convey to him the premises as soon as one-third of the purchase money shall have been paid in regular dues on his stock. His stock will be assigned as collateral security, and the payments will be credited as rent until the deed is made. Then the purchaser will execute his mortgage for the unpaid balance due on the property on the terms of his original bid for the money. It is usual to require a cash payment equal to the amount of the bonus; that is, ten per cent of the purchase price. This is a valuable feature in building-association methods. It adds to the profits of the association. This plan is adaptable to private enterprise, and is liberal in its terms to the purchaser.
In most associations organized on the perpetual plan, as previously described, the demand for funds is greater than can besupplied from depositing members. This has given rise to the “paid-up stock” feature of building associations. Under this plan one may invest money in any sum according to the terms of the charter and secure from the association a certificate of paid-up stock which participates in the regular dividends of the company. In this way, funds in larger amounts may be secured than come from the ordinary payments by regular weekly dues. It is not unusual for individuals to purchase paid-up stock to the amount of several thousand dollars. This is a great help to an association which is short of funds, as it serves to increase its membership by addition of borrowers. There is no better place to invest trust funds than in the paid-up stock of well-managed building associations. Primarily, for the reason that each stockholder is pledged in the amount of his stock to pay principal and six per cent interest on all withdrawals; hence, the funds may be withdrawn at any time, and six per cent interest thereon demanded. Furthermore, building-association stock is not taxable in most States.
Individual and moneyed corporations are coming to consider the matter of loans, and means leading to their repayment, on the building-association plan. This will be brought about largely by the low price of money throughout the country at this time. Savings banks, mortgage companies, and life-insurance organizations are finding it difficult to loan their funds at a price that will pay their fixed obligations; hence, they are seeking means which will lead to a more profitable investment of their funds. The building-association plan of loaning money is one solution of the problem. The low price of money is one of the elements which within the next few years will enable nearly every one who so desires to secure a home through the building association, or some plan which has its outgrowth therefrom.
PURCHASE OF A LOT.—THE BEST THE CHEAPEST.—A GOOD LOT AS A BASIS OF SECURITY.—THE BASIS OF VALUE IS THE RENTAL.
PURCHASE OF A LOT.—THE BEST THE CHEAPEST.—A GOOD LOT AS A BASIS OF SECURITY.—THE BASIS OF VALUE IS THE RENTAL.
There are many things to consider in connection with the building of a house other than those which are constructive. One may lay aside that which has to do with appearances, convenience, stability, and all that is architectural, and yet have food for thought in connection with the making of a home. For instance, the lot. No one can afford to build on one that is absolutely cheap, or one that is cheap because it is not well located or favorably thought of by the large number of people. A lot that is absolutely cheap is not often worth even what is paid for it. One of small means can least of all afford to put his money in a questionable piece of property. A lot may be relatively cheap, and be a good investment. For instance, there is a street lined with comfortable houses. On this street live people of more or less wealth and unquestioned ambition. Three or four squares beyond the last house of this street the lots may be relatively cheap. The sum asked for them is not great, for the reason that few care to go out so far. Still, by adopting a little of the pioneer spirit, one can make a purchase of these lots and be reasonably certain of being rewarded for his foresight. It is much better to buy such a lot, and live for a year or two without immediate neighbors, than to buy one which is absolutely cheap because the surroundings are positively unfavorable.
A man of small means least of all can afford to buy a lot that cannot readily be sold for all it cost. We often hear people say, in regard to lots that are surrounded unfavorably, “What is the difference? It suits us; we can be as happy and comfortable there as any place. If we like it, why should any one else complain?” No one else will complain. It may occur that the owner of this absolutely cheap property may wish to sell. He may become embarrassed in his business, or one of many things may happen to cripple him financially. If he can sell at all, it is at a sacrifice. If a mortgage is foreclosed, there is no reasonable chance of redemption. If the lot is well located, and he becomes financially embarrassed, he can sell for full value and thus relieve himself. If there is danger of foreclosure, a sale can be readily effected, and thus all danger of loss be averted. The idea in buying a lot is to get one which can be readily sold. This is an important matter.
In carrying out this principle, one of moderate means will often buy a lot of higher cost than is apparently justifiable. However, this may be the best thing for him to do. It may be good business. If he wishes to borrow money with which to build, he has a better basis for credit. If he puts his house on a good lot, there is opportunity of selling it because of its favorable location, and thus the danger of embarrassment is averted. One can afford to borrow money to build on a good lot, for the reason that there is little danger of losing either the lot or the money. The house and the lot, if it rates well in the public mind, can be easily sold. The lot should not be selected or the house built, if its sale is not entirely possible. There are towns as well as localities in which no one of moderate means can afford to buy or build. Yet such locations are often selected because they are cheap, and living is cheap. The fact of thischeapness is against it. The property is cheap because it is worth little or nothing. It is cheap because no one can get out what he puts into it. This may apply to a lot in a particular town, a particular part of a town, or to property in general in a county or a State. Thus it is that no one of moderate means can afford to buy absolutely cheap property.
A young man once went to an architect to advise with him in regard to the selection of a lot. He said,—
“There are two lots on a certain street that I can get for $1,200 each. That is a little more than I want to pay, as even then I would have to borrow more money than I wish in order to build my house. One of the best lots I know anything about is on another street, but I can hardly think of that, for they ask $1,500 for it.”
“I know the lot,” said the architect, “and the $1,500 lot is the one to buy. The $1,200 lots are of questionable value. The surrounding conditions are such that their value is not liable to increase. The $1,500 lot is in the swim; two squares below, lots cannot be bought for $2,400; in fact, they are not in the market. They are owned by people who desire to hold them. In two years you will be reasonably certain to realize at least twice the difference between the values of the $1,500 and the $1,200 lots. In one case, the value of the lot is not liable to increase; it may decrease. In the other instance, there is reasonable certainty of a large increase within a short time. It is on the edge of high values.”
“But I shall have to borrow so much money with which to build, if I take the high-priced lot.”
“What of it? Say your house is going to cost you $3,000. You say you have $2,800 in cash. In one instance you would have to borrow $1,400, and in the other $1,700. You arerunning much less risk in borrowing $1,700 than you are in borrowing $1,400. If you had to sell, there is a reasonable certainty that you could always make a profit on your $4,500 investment, and a very questionable probability as to the $4,200 investment.”
There are those who do some very remarkable things for the sake of keeping out of debt, which, in the end, develops into more loss than would be possible in the case of debt. For instance, one will buy a lot for $1,500, and put a $1,500 house on it. In time the value of the lot increases; at the same time the value of the house decreases. The lot in itself would be worth more if the house were off it. It is a cheap house on a good lot. Thus it is that such property is often sold and the improvements counted as nothing. Again, exactly the other thing may happen. An expensive house may be built on a cheap lot. When finished the house is worth much less than it cost because it is not well located. One cannot expect to get full value for the lot without moving the house, and altogether the situation is disagreeable. How much better it would be, from a business standpoint, not to build at all, use the money some other way, or borrow enough money to have the house and lot properly located. In one case there is positive loss; in the other, a reasonable certainty of profit.
Another thing for a man of moderate means to bear in mind in building a house is, that the investments as to the house and lot should be such that in case of rental the return derived would pay a fair interest on the investment, and leave a sufficient margin for taxes and repairs. As long as this condition exists, there need be no fear of loss through foreclosure. The sale of the property may become necessary through embarrassment in business, loss of situation, or illness; but in such a case the property can either be sold without loss, or it can be rented at a figure that will pay all fixed charges, which fact in itself establishes a value above its cost price. If these principles are all carried out, there is little chance of loss.