5 real estate assumptions to rethink

Mood of the Market

By Inman News Feed
Add Comment Add Comment | Comments: 0 | Posted Apr. 30, 2012

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Mood of the Market

Tara-Nicholle Nelson
Inman News®

Real estate appraisal reports are almost always accompanied by a set of assumptions: statements or conditions that the appraiser assumed to be true for purposes of drawing some of the conclusions necessary to create an estimate of the home's value. Interestingly, though, many appraisal reports give their basic set of assumptions the subtitle "Limiting Conditions." This implies that the assumptions may limit the validity of the appraisal findings in the event the assumptions turn out to be invalid.

For example, appraisers commonly assume that the land on which a home is built is not contaminated; if it turns out later that it is, all bets are off in terms of the property's value.

The same goes for our decision-making in real estate and in life, generally, for that matter. We get so accustomed to our thought shortcuts and assumed beliefs about a subject that they can actually limit the integrity of our thought processes and decisions -- especially if we fail to notice, question or ditch assumptions that are flat-out false or have become invalid over time.

The housing recession has changed the facts of the market, and has changed our minds about real estate. Those changes warrant a deep rethink of some widely held real estate assumptions, old and new. Here are a handful of the real estate assumptions that we should all reconsider:

1. Renting is cheaper than buying. The days when this one was a given are long gone in some places, and in some cases. In some places, the housing recession delivered a sound spanking to home prices. But it had the opposite impact on rental rates almost everywhere else. On top of all the would-be buyers who had to keep renting because they couldn't qualify for mortgages over the past few years, there was also an influx of former homeowners who had lost their homes to foreclosure into the rental market.

Higher rents and lower sale prices mean that, in many areas, renting costs just as much or more than buying or owning a home. Real estate website Trulia's recent Rent vs. Buy Index found this to be the case in 98 percent of America's 20 largest cities, taking into consideration both the added expenses and tax advantages of owning vs. buying (the exceptions were areas like San Francisco and Manhattan, the markets that were the most recession-resistant).

If you're operating on this assumption and it has kept you in the rental market, you might want to actually do some online house hunting, meet with a local real estate agent and a mortgage broker, and run your own numbers to see if your assumption might actually point to homeownership as the more affordable option for you.

2. Buying is better than renting. For various reasons throughout the last century, the American dream evolved to include homeownership virtually without question. But on today's market, it is absolutely not the case that everyone who can afford to buy a home should.

If your own personal finances are immature or you're living paycheck to paycheck, or if you are in a career or relationship situation that may cause you to have to move in the near term (less than five years or thereabouts), it might be advisable to rent instead of buy a home. You'll lose out on the tax and other financial advantages of owning, but you won't find yourself unable to make your mortgage if you have a bad month, and you will avoid being stuck in an upside-down home you can't sell.

Of course, these guidelines apply mostly to your primary residence. With the increased mobility younger generations seek, I have already started to see a trend of young people with strong incomes taking advantage of low prices and interest rates to buy income and vacation properties that they can rent out and possibly retire to before they settle down enough to buy their own residence.

3. Sellers are greedy. OK, so some sellers are probably greedy. But so are some buyers, for that matter. The reality is that sellers are protective of their biggest financial asset and the place where they have often spent some of the precious moments of their families' lives, and are not willing to give their homes away at a bargain-basement price.

The deeper reality is that sellers often have mortgages they must pay off from the proceeds of sale or face a short sale or even a foreclosure. Even those that are not upside down or in mortgage distress may have money invested in the property that they want to try to get back out, or may be looking to the proceeds of the sale to fund their family's next move.

For some sellers, this translates into an unrealistic fantasy about what their home is worth. For many others, though, the reality of their financial investment and involvement with their home simply underpins their willingness to invest in preparing and staging their home for sale -- and an unwillingness to take the first lowball offer that comes their way.

4. Buyers are cheap. Many buyers are certainly frugal, and especially so when it comes to trying to squeeze the absolute most bang from their hard-earned, hard-saved homebuying bucks. That said, buyers absolutely will pay for properties and locations that press the emotional buttons that activate the vision of the lifestyles they crave for themselves, their families and their futures.

Speaking of emotional priorities buyers will pay for, they will also pay for the certainty of securing their dream home and eliminating threats to it, whether those threats come in the form of competing offers or feet-dragging, short-sale staffers at the seller's bank.

That's why, even on today's slow-to-grow real estate market, homes that are in great condition, in great neighborhoods, and in great and thriving cities are getting multiple, over-asking-price offers. And this is especially true for "regular" equity sales, in which buyers are manifesting their willingness to pay a premium for the luxury of not having to do a deal with the seller's bank.

5. Buyers can name their price on today's market. We've all heard the pundits crowing and read the headlines blaring about the buyer's market that many buyers have begun to believe the hype. Unfortunately, many buyers will have to house hunt for months, make several lowball offers and lose several dream homes before they understand the truths discussed in the points above -- namely that no seller will give their home away for less than what it's worth, and that great properties will be subject to great competition even on today's market.

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