How To Cope With The New Market Realities
Volumes have already been written about how we got where we are, in todays Real Estate market, so I won't try to rehash that information here. What I want to share is my opinion of how you should be looking at your next real estate purchase/investment.
During the heady days of the the Late 2004-early 2007 market many buyers bought by price alone. At the time you could not really fault them. Loans were easy to get, appreciation was growing by leaps and bounds on every property and to many inexperienced real estate investors it did seem as though the sky was the limit. Oh what a difference a year can make.
Woulda, Shoulda and Coulda might be easy to say now but at the time everyones judgment was distorted by the promise of great profit. As an agent working the market at the time I saw several classic mistakes being made by the inexperienced and even the experienced who decided to throw caution to the wind. Even today as we survey the ashes of the crash I hear people not talking about the flaws in their investment logic but just how unfair it is that they did not get to cash out before prices leveled off and came down. I have heard the expression "When you lose don't lose the lesson" so I think it is important to realize that the biggest part of the problem is a lack of understanding of the basics of real estate investing.
Time for a quick review of Fundamental Principles of Real Estate investing:
A) Location, Location Location:
There is a solid reason why the same home located in an outlying area of town is less than one that is centrally located. Desirability plays a big factor in purchasing a home. If it is affordable enough people are always going to choose the home that is closer to work/conveniences and daily activities. Far flung homes that require a commute and in areas that lack essential or basic services simply won't sell as well. Period end of discussion. When you look for a home look at where it is. Most communities have areas that are considered less desirable. Sometimes if you are new to an area this is not obvious. It is important to work with a Realtor or trusted resource who will be candid with you about the positives and negatives of the different areas. Just remember if the same house is much cheaper somewhere else in town there is a reason. It may turn out to be a reason you are comfortable with just be sure you know what it is.
B) Resale Potential:
Although you may think that you have found your dream home and you will never move again the reality is much different. Statistics show that we move every 5 years on average. Life changes just happen to everyone - no one is exempt. So, for example, when you are considering the new home community - think about how soon will the neighborhood be finished? You don't want to have to compete against the builders NEW homes with your "slightly used" home. Some other food for thought:
Is the community you are buying in lacking in essential services that won't be in place by the time you need or want to move?
Are you buying a 2 bedroom home in a family community where 3 and 4 bedroom homes are more common/desirable?
What is special about the home? If it is only the price ask yourself why.
Are wind, noise, traffic, flight patterns an issue?
Does every home have a view except yours? Is there a common amenity that you don't have?
Your basic rule of thumb needs to be a house that is as appealing as possible to as many people as possible. Examples are: A good floor plan, a generous yard, a downstairs bedroom, good services and schools close by. These are the things that are going to help you resell you home in an up market or a down market. If your community is known for something such as large yards, waterfront or golf courses these would be strong considerations in your purchase. Buy the thing that people are coming to your community for. Your compromises in your purchase can cost you in the end. Be sure that they well thought out.
C) Fitting Your Lifestyle and Goals:
Currently there is a really pretty (very expensive) two door import convertible on the market. Every time I see it I stare longingly. It is so sleek and cool looking. I can visualize myself in that car. However, the reality of my life is that anything less than a 4 door car is just idiotic. I have people in and out of my car constantly. It needs to be comfy and roomy and have a big trunk to cart around all my stuff.
This same logic applies when you are buying a home. A two story home with all bedrooms upstairs makes no sense if you have to care for an aged relative who can't do stairs, a sleek multi -level loft is not for you if you have a toddler, income property is not for you if you are not prepared for the trials of being a landlord (including budgeting for the month when the tenant can't pay rent) Living in the suburbs with a big yard is not very logical if you work 10 hour days in the city.
Not buying the right house for you is typically a reason that people wind up having to sell before they are ready. One of the most common scenarios I see is people who have a wish list of must have items that overtakes common sense. Typically these buyers wind up with a home in the wrong area or too far from where they need to be just to fulfill the wish list. Be realistic about the "must haves" on your list balance that against the all important LOCATION.
D) Budget Concerns:
Just because someone will give you a master card with 20,000 credit limit doesn't mean you should take it! The same is true with home loans. There are formulas to figure out how much house you can afford. A popular one is that your housing costs should not exceed 28% of your net take home pay. You know your budget. You know what you can afford. During the last ten years I have met thousands of home buyers. It is amazing how 99.999% of them know, within a range of $25,000, how much home they can afford. I have simply never met someone who thought they could spend 800K and we found out later it was really 300K. Just doesn't happen like that.
To be fair, the lenders were out of control, 1% mortgages, confusing variable rate terms and 103% financing and the list goes on. However, like the credit card example above you are in charge of your financial destiny. You don't have any business signing up for loans you do not understand or payments you know you can't afford. Personal responsibility plays a big part in this. I really like Suze Orman on the cable channel and her personal financial goal setting and education programs. Well worth watching.
Bottom line here is that you are much better off in a smaller or more affordable home than stretching yourself to the breaking point in the hopes of making up the difference in appreciation. Real Estate is cyclical and always has been. It is dependent on many factors in the economy at large and banking your financial future on a hoped for short term gain is disaster waiting to happen no matter what the investment vehicle is.
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In my next installment I am going to focus on what to buy now, what considerations to make and how to look at and analyze purchases in a market where credit is tight and homes are glutting the market.