The Investment Trap

Many buyers fall into a trap when looking at homes. This trap is especially common during a market that is robust and appreciating. This is what I call the "investment trap". I wrote about this in a chapter of my first book in 2010 (Don't Panic, Now is the Time to Supercharge Your Portfolio, America Star Books, 2010). What is the "investment trap"? Read on...

To understand what I mean by this we first must look at the core reason people choose to buy a home rather than rent. There are many advantages to home ownership but there are some disadvantages too. So buyers are making a choice between the two. Today I am skipping the reasons for and against and working under the presumption buyers have made the choice to buy. Most buyers however, and there are a great many surveys that validate this, buy over renting because of the "investment" opportunity in the house.

First of all understand that there is a legitimate investment opportunity in buying a home. The opportunity lies in the creation of equity through appreciation and reduction of principle over time. But many buyers spend way too much energy worrying about the investment angle rather than the suitability of the property for its intended use. All too many buyers treat the purchase process as if they are buying an investment property to rent out rather than a property for which they will live.

In the book I query the notion that if a buyer wants to treat a home as an investment then they should be renting out rooms to tenants to maximize the investment. This may seem extreme, but many buyers miss out on the perfect house because they low ball offer in a seller's market, looking for an investment deal. The real estate market is a commodity market like any other. It is cold and ruthless and does not care about the plight of those who ply its roads. There is nothing wrong with looking for a deal but at some point buyers need to take the counsel of their trusted real estate professional. If a buyer does not trust their agent, then perhaps they need a new agent.

If a buyer is seeking a house to live in, then that house is first and foremost their home. It is designed to provide safe and comfortable shelter for their family. That is the primary function of the home. It is secondarily an investment opportunity. Those that insist upon seeking a "deal" often miss out on the best value of all, which is the perfect home for their family and lifestyle. In an appreciating market the equity advantage is near parity across the whole of the market. Don't get me wrong here; a trusted professional should be looking out for buyers by helping them negotiate the best terms possible once the buyer has chosen a home. Buyers need to be aware that some houses are priced right.

Owner occupant buyers are well advised to look at homes that will provide them with the most comfort and convenience within their budget. Once that home is found they can work out the best terms possible in the marketplace. In my experience appreciating markets do occasionally produce overpriced listings from sellers trying to capitalize on the upswing in values. A professional agent that knows the market well, can help buyers identify an overpriced listing and advise them on a solid offer that gives them an opportunity to get the lowest price possible on that particular property. A well priced property in this market will likely get sold at full price and rather quickly. Under priced homes are often selling instantly with multiple over asking offers. There are some nuanced exceptions, but like I said before, the market is cold and ruthless.

Those buyers caught in the "investment trap" that place the investment value of a listing in front of the value it can provide as a "home" often miss the best opportunity of all. There is a secondary "trap" as well. In an appreciating market prices will likely get higher rather than lower. Every time a buyer misses out on a home the next one that comes on the market may be more expensive than the one they passed over or lost in the bidding exchange. They are also at risk of unfavorable interest rate changes that create greater expense and reduce the investment value. These buyers may end up "settling" for something less than ideal when the best option was missed.

The investment trap often keeps buyers from getting the very best house for them. Sometimes the ideal house is not the best "deal". In the end buyers will find that almost any home they choose over a long term will be a solid investment. I believe many a great opportunity is lost when buyers buy a house instead of a home because they put investment value first rather than second where it belongs.

Natural Beauty with few Natural Disasters

We got it pretty good here in Southwest Washington State. A recent CNN-Money report on natural disaster risk took data from 3000 US counties (Hawaii was conspicuous by its absence). It seems the places least likely to have a wildfire, hurricane, tornado or earthquake are the most likely to freeze you to death in the winter. North Dakota and Montana had large areas of minimal risk to home destroying disasters.

Here in fantastic Clark County we are nicely nestled in the low risk category. And it almost never gets below zero here either. Home owners should not downgrade their insurance just because we have good marks on the disaster front. A traditional fire in the home or other man made forces can still wipe out your home. Insurance companies rate ares based on the likelihood of a claim. Areas on the map below with high risk of natural disasters are rated up.

It is nice to know that we sit in an area that is relatively safe from these catastrophes, but keeping our homes well covered is always a sharp idea. I have run into people with free and clear homes that do not carry home owner's insurance. That amazes me. In order to reasonably consider self insuring you really need to be a millionaire. A standard home fire will do $40,000-$50,000 damage if not destroy the entire home and everything in it. Spending $400-$600 a year to provide coverage against that loss is wise, even if you are a multi-millionaire. An average home valued at $200,000 with $150,000 in contents would be a $350,000 loss in a major fire. Few people have the resources to recover from that financially. It is bad enough losing the irreplaceable momentos of ones life, let alone getting stuck with the bill.

Be sure to evaluate you homeowners policy every year or two to be certain your coverage is adequate.  

Ready, Set, Sell it!

The summer market is still looking warm and delicious for sellers. Turn key, move-in ready properties are still the habanero sauce in this real estate tamale. There is however a shortage of well-priced listings in the low to mid price ranges in general. Buyers are lurking about in every neighborhood, looking for an opportunity to capitalize on low interest rates. There are also many buyers still looking for a "deal". They likely won't find it in a clean ready to live in home, but they might find it in a less complete home that needs a little TLC. Many buyers are realizing that the 'screaming deal ship' left port a few years back. They still want a deal and a less than perfect listing could be mutauly beneficial for buyer and seller.

Generally speaking this market likes clean and tidy listings and any house that needs some love and attention falls into the rule that ten will get you twenty. If a seller has the cash it is usually well advised to spend it and take advantage a market full of thirsty buyers seeking refreshment in the form of a sharp looking home. If a seller is tight on cash then they still may have an opportunity to sell their home to one of those "desperately seeking a deal" buyers that are plying the real estate ads every day.

The only thing missing in the market is listings! Many homeowners may be unaware that their previously upside down house could very well be in a profitable position to sell. The median price in Clark County Washington is now roughly 90% of the 2007 median price. We are well on pace to return to the 2007 median values sometime early to mid next year. Numbers vary slightly from source to source but the bottom line is that many homeowners are in a position to sell. They also may not realize that their home has scores of potential buyers just waiting for an opportunity to buy it.

Sellers are advised to consider that as their current home escalates in value so does that home they will replace it with. Many sellers are upgrading to a more expensive home. A ten percent gain on their $200,000 home is $20,000 but they will have a $30,000 price increase on the $300,000 upgrade house. So those potential sellers are in that twenty will cost you thirty situation and waiting to list may or may not be the best course of action. Homeowners should sit down with a trusted real estate professional to determine whether or not now is the best time to sell. For some sellers waiting a bit longer may yield better results. The decison to wait however is always based on the uncertainty of the future. Caution is always advised when planning ahead based on current market trends. The market does not always do what people want it to do. For sellers looking to upgrade, selling now may yield a little less on the current home but could save thousands on the upgrade.

Sellers should also understand that this real estate market is very healthy but it is not the rabid, frothing at the mouth, anybody can get a loan, market of the mid 2000's. An overpriced listing in any condition will sit. Buyers will scrutinize price. Sellers should avoid the greed factor because today's cautious buyers want a house but they won't be taken for the proverbial "ride". Seller's also need to understand that appraisers are less liberal with overpriced homes than they were prior to the "crash".

It is mid-June and this is the time to jump into the market with a new listing. Buyers love to close in the summer, especially if they have children. They also don't like to move in the rain and snow, so summertime is not just hot on the thermometer, it is hot in the real estate market as well.