by Alex Wang on Feb 12, 2007 | 1 Comment »
Home buying is a very personal decision and people who are looking for a home often fall prey to conventional wisdom.
But I'm going to challenge the reasoning behind some widely-held real estate notions because it's paramount that you treat your personal requirements as the key to the real estate decision process. I believe that it's important that you be able to make choices suited to your own needs and wants, not what the crowd thinks you should do.
Here are some common myths about real estate that home buyers have fallen in love with.
1. You Should Treat Your Home The Same as Other Investments
Yes, your home is an investment and one of the areas I research diligently for my clients is the probability of asset appreciation.
But the house you live in isn't not your stock portfolio, college fund, or that rental property you own in Sun Valley. What you would do for an investment property is very different from what you do with the house you live in.
If your home were an investment property, say a rental or a place you planned on flipping, would you choose to augment it with things that make your lifestyle better or items that were good enough to fill in the all the marketing checkboxes (clean carpet, dishwasher, washer-dryer, etc.) for as long as possible at the lowest practical cost?
If it were an investment property, would you, for example, wallpaper your baby's nursery in vibrant yellow and balloons, eliminating anyone without a baby as a buyer or renter? Imagine trying to sell a Hummer with George W. Bush bumper sticker to passionate liberals in San Francisco: you might, but good luck.
Instead, what you would most likely do for an investment property is make the place generally acceptable to the widest range of buyers and renters and let its location and features speak for themselves. If there are items that can both meet your personal requirements and augment the value of your house to others, then you can kill two birds with one stone.
If you treat your home like it's only about the mortgage interest deduction and the resale value, then — as economists say — you're not maximizing your utility. Unlike things you should treat as pure investments, I recommend that you also think of ways that the house can make your life, not just your bottom line, better.
2. You Can Always Sell When You Need To
Selling a home is a lot of work. Making it look presentable is one thing, but keeping it presentable to the (hopefully) large number of prospects and agents coming through your home requires constant diligence. Having to find a place for your valuables and putting away many of the more personal items that may turn off prospects or prevent them from "seeing the house as their own" makes selling a lived-in home much more challenging.
Besides the personal disruption in your family's lives, the market does whatever it decides to do regardless of your interests. If you live in a community where many of the houses or condominiums are similar, you may find stiff competition and price sensitivity with buyers.
The point is that your home isn't a liquid asset and you don't always get to pick the perfect timing. Homes are far less liquid than rentals or investment properties because you need to remove your personal connection to them in order to sell and market them effectively.
3. You Should Only Buy in Neighborhoods With Good Schools
There's no doubt that children are an important part of the home buying decision, but occasionally, you'll run into parents who want to buy a bigger home than they need in a fancier neighborhood than they would normally consider because junior's educational needs.
It's honorable to consider your children's needs but parents are human too and sometimes there's a little "keeping up with the Joneses" factored into the decision.
And if keeping up results in stretching your finances, a child's well-being may actually be decreased because (1) financial stress leads to emotional stress, and (2) you may lose your house and have to move, making your family situation less stable.
You may actually save money and provide for your children's education by living in a less well-to-do neighborhood and sending them to private schools.
Also, because good school districts are often priced into the house, you may not see a significant appreciation in your house because of them. In general, neighborhoods with good school districts retain their value in slumps more easily while up-and-coming school districts have more upside potential.
4. Days-On-Market (DOM) Tells You Important Information About a Property
People often make assumptions about a property based on the number of days it's been on the market (DOM). But the number alone doesn't provide enough information to make a judgment call on a property.
In fact, a common real estate agent trick is to game the DOM so that it tells prospective customers exactly what they want to hear: that the property is fresh on the market.
Reacting to the DOM is an instinctive reflex, but basing any real estate decision purely on assumptions about the DOM is an invitation to be gamed and a way to miss out on properties others may not have had a vision for.
5a. The Market Will Always Go Up
5b. Housing Can Never, Ever Reach These Levels Again
Over the long haul, real estate follows inflation and job growth. In the United States, the former number always points up (Japan proves the other way isn't impossible), but job growth varies drastically from region to region.
My former home town (one of them at least) of Ft. Wayne, IN is a very affordable place to live but suffers from job flight. Same with Detroit. In these situations of weak salaries and large job losses, it is definitely possible for the value of a home to stagnate or decrease.
In a broader context though, whether its stocks or real estate, people extrapolate from where we are today and what's been going on in the recent past. That's why all those TV commercials for mutual funds say, "Past performance is not an indicator of future results."
When the market is going up, many people act like the market will go up for as long as they're in it even though they really know better. Alan Greenspan used the term "irrational exuberance."
The converse is true too. There are areas in the country where the bubble burst and sky indeed fell, but there are also ways that a real estate market can subtly and gradually correct itself.
If you're considering buying a home, just know that when large sums of money are involved, people do and say grand and irrational things on both sides of the fence to advance their agendas. It's up to you to decide what's best for your situation and seek trusted advice if you have questions.
(c) Steve Leung
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