Tuesday, October 05, 2010

12 Useful Facts for Home Buyers and Owners

Next to public speaking, buying or selling a home is at the top of many people’s fear and loathing list. Here are 10 things to consider when buying a home.

1. The housing market isn’t really a market

The housing market is not like the stock market. Even though housing analysts like to compare real estate returns to stock market returns, it is a very misleading comparison.

2. Real estate doesn't outpace the stock market

The average stock in the Standard & Poors 500 index, a basket of blue chip U.S. stocks, has returned about 7.5% a year after inflation in each of the last 25 years.

In contrast the average increase in the value of a Canadian home over the same period was 2.5% per year. (In other words the value of your home will be only slightly higher than the inflation rate.)

Yes, your home is an investment, but its also a way to SAVE money so you're not paying for rent. Don't expect to actually make money by buying and selling your home.

3. Don't gamble with your home

People who leverage their home to buy stocks deserve to lose their home by betting on the stock market. If you're putting all your eggs in one basket sooner or later you always lose the basket.

4. It’s NOT always a good time to buy

People who bought at the height of the market in the 1989 real estate bubble, didn’t break even until 2002. Housing prices don't always keep going up. Bubbles can, will and MUST burst.

5. Location, Location, Location

Paying extra for a nice location downtown with a low crime rate is worth it. You save on mileage, lack of crime, lower insurance premiums, and older communities are more immune to market slips and slides because they maintain their value more.

6. Buy the cheapest house in the neighbourhood

Sounds like strange advice, doesn't it? The cheapest house in the neighbourhood is discounted and sold at a lower rate because it will likely be slated for renovations in the future. Its a good deal, your property taxes will be less, and after renovations you will be able to sell it a decade later for a tidy profit. The rise in local property values (especially in older neighbourhoods) means your home will rise with the community.

Or you may decide you love the neighbourhood and refuse to ever sell. Win-Win.

7. You don't need an agent, but it is a really good idea

Not everyone wants or needs professional advice from a realtor and they have the option of selling their home privately. But good luck doing that. A good realtor is a huge asset, allowing you to save time, stress and your home will sell for a ton of extra money which outweighs the commission on the house. Yes, you can Do-It-Yourself, but dollar-for-dollar its still more worthwhile to have a realtor do it for you.

8. Find a local agent

Hire an agent who knows they neighbourhood you are either selling or buying in. The fact that they know the neighbourhood really well is the BIGGEST advantage an agent has over selling privately. Results will vary depending on the agent so when interviewing agents ask lots of questions about the history of the neighbourhood, local schools, stores, gyms, etc. everything you can think of.

9. Renovating does not guarantee Extra Returns

Don't watch those moronic renovation TV shows that redo an entire home in a week, gut your home, cost a fortune and then presumably sell your home for a huge profit. Its unrealistic and doesn't happen in real life.

If you renovate anything the best thing to do is redo the kitchens and bathrooms. The value of kitchen/washroom renovations can boost the sale price by 75% to 100% AT BEST of what you spent on the renovations. Ie. If you spend $10,000 renovating the kitchen, the best you can hope for is an extra $17,500 to $20,000 boost in your home's value.

And then there is the Diderot Effect. Denis Diderot was a French philosopher circa 1772 who made the mistake of buying a fancy new dressing gown. Suddenly everything else didn't match and he ended up having to buy a new closet, new wardrobe, new sheets, new bed, new desk, new furniture and basically refurnished his entire home just so it would match his dressing gown.

Renovations frequently go overboard on spending because of the Diderot Effect. You could very easily spend thousands more than expected on things potential homebuyers don't even want.

10. A good ol' fashioned coat of paint

Get a second pair of eyes before you decide to sell your home and ask them to tell it as it is. You may be noticing the coffee stains, the holes in the plaster, the paint which looks dull and faded... but those are just superficial qualities that can easily be fixed or replaced. You probably don't need to sell your home if its just minor details that just need a proverbial coat of paint.

11. Stop trying to time the market

Selling your home during a market peak and then renting a place in the meantime while waiting for a market crash is silly.

Sure, in theory you could make/save a bundle by buying a home at a lesser value when the market crashes... but what if it only crashes 5 to 10% and it wasn't worth it? What if the market doesn't crash at all and prices keep going up for another 3 or 4 years?

And then you throw in the towel, buy a home at a higher price... and voila! That is when the market crashes.

Don't buy a house to make a profit. Buy a home because you want a nice place to live. Buying a home is supposed to be a long term commitment. If you're lucky and love the place it may be the last home you ever buy.

12. Avoid Emotional Attachment

You may love your home and think its totally awesome, but your emotional attachment may be clouding your judgement. (Attachment leads to the Dark Side of Real Estate... :p )

Being emotionally attached to your home means your objectivity is compromised. Your home will be more difficult to sell because it will be overpriced and the offers people give you will be significantly less.

Get a reality check!

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