5 housing bubble lessons for buyers

Don't underestimate impact of deferred maintenance, refinancing

By Inman News Feed
Add Comment Add Comment | Comments: 0 | Posted Nov. 21, 2011

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Don't underestimate impact of deferred maintenance, refinancing

Dian Hymer
Inman News™

Many mistakes were made by homebuyers and sellers during the great housing bubble that burst in 2007. Today's buyers and homeowners can learn from these past mistakes.

Home prices went up for so long that most people believed that this time things were different. Previously, when prices rose for several years in a row, there was usually a correction in the market. In 2005 and 2006 when prices rose precipitously and buyers clambered to buy, it was thought that prices would never come down.

Prices don't just go up; they go up and down. This became abundantly apparent when the bubble burst and home prices subsequently dropped 30 percent between 2007 and 2011.

To make matters worse, too many buyers bought with too little cash down. They were banking on home-price appreciation to bail them out. When depreciation replaced appreciation, lenders ended up taking back properties by the millions through foreclosures.

HOUSE HUNTING TIP: Buying your home is not like buying an investment property where it may be advantageous to leverage as much as possible. Your home should also not be viewed as a piggy bank against which you can borrow for vacations, new cars and college tuition.

That strategy got a lot of homeowners into trouble if they refinanced during the bubble years and then ended up being unable to sell their homes for the amount they owed the lender.

Many homeowners refinanced to make renovations and improvements to their homes figuring if they did a good job, they would recoup the amount they spent and then some. During the recent price decline, homeowners often received little if any increase in value due to the improvements they made to the property if they bought after 2000. Home prices in many areas dropped too precipitously.

You need to keep your home well maintained if you expect it to sell well when you decide to move on. However, don't spend a lot on improvements if you don't intend to stay in the home and enjoy them.

It isn't only during periods of price declines that improvements don't pay back well. In general, in most parts of the country, they don't pay back the amount invested, according to Realtor magazine and the National Association of Realtors' collaborative annual surveys. Most homeowners aren't aware of this.

This doesn't mean that you shouldn't remodel your home. For example, if you want a lifestyle that includes a great space for casual living and entertaining and you can afford to, go ahead and create it. Your enjoyment of the improved space should create value for you, even if you don't recoup the total amount invested in the project. However, don't over improve for the neighborhood.

During the bubble years, many homes were sold "as is" with respect to deferred maintenance and property defects. In many cases, buyers are still buying "as is." The mistake that some bubble buyers made was that they didn't have the defects or deferred maintenance repaired, but lived with the problems as they happily watched property values rise.

When the market turned down, sellers often had a hard time selling without making large price concessions to allow for the property problems. Buyers in today's market are looking for homes they can move right into without having to do a lot of work.

THE CLOSING: There's nothing wrong with buying "as is" as long as you know how much it will cost to correct the problems and you have the work done. You should make sure that the price you pay takes into account the amount of work the property requires.

Dian Hymer, a real estate broker with more than 30 years' experience, is a nationally syndicated real estate columnist and author of "House Hunting: The Take-Along Workbook for Home Buyers" and "Starting Out, The Complete Home Buyer's Guide."

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