Why Buying a Home is a Good Idea
The Best Investment
As a fairly general rule, homes
appreciate about four or five percent a year. Some years will be more, some
less. The figure will vary from neighborhood to neighborhood, and region to
Five percent may not seem like that much
at first. Stocks (at times) appreciate much more, and you could easily earn
over the same return with a very safe investment in treasury bills or bonds.
But take a second look…
Presumably, if you bought a $200,000
house, you did not pay cash for the home. You got a mortgage, too. Suppose you
put as much as twenty percent down – that would be an investment of $40,000.
At an appreciation rate of 5% annually,
a $200,000 home would increase in value $10,000 during the first year. That
means you earned $10,000 with an investment of $40,000. Your annual "return on
investment" would be a whopping twenty-five percent.
Of course, you are making mortgage
payments and paying property taxes, along with a couple of other costs.
However, since the interest on your mortgage and your property taxes are both
tax deductible, the government is essentially subsidizing your home purchase.
Your rate of return when buying a home
is higher than most any other investment you could make.
Income Tax Savings
Because of income tax deductions, the
government is subsidizing your purchase of a home. All of the interest and
property taxes you pay in a given year can be deducted from your gross income
to reduce your taxable income.
For example, assume your initial loan
balance is $150,000 with an interest rate of eight percent. During the first
year you would pay $9969.27 in interest. If your first payment is January 1st,
your taxable income would be almost $10,000 less – due to the IRS interest rate
Property taxes are deductible, too.
Whatever property taxes you pay in a given year may also be deducted from your
gross income, lowering your tax obligation.
Stable Monthly Housing
When you rent a place to live, you can
certainly expect your rent to increase each year – or even more often. If you
get a fixed rate mortgage when you buy a home, you have the same monthly
payment amount for thirty years. Even if you get an adjustable rate mortgage,
your payment will stay within a certain range for the entire life of the
mortgage – and interest rates aren’t as volatile now as they were in the late
seventies and early eighties.
Imagine how much rent might be ten,
fifteen, or even thirty years from now? Which makes more sense?
Some people are just lousy at saving
money, and a house is an automatic savings account. You accumulate savings in
two ways. Every month, a portion of your payment goes toward the principal.
Admittedly, in the early years of the mortgage, this is not much. Over time,
however, it accelerates.
Second, your home appreciates. Average
appreciation on a home is approximately five percent, though it will vary from
year to year, and in some years may even depreciate.. Over time, history has
shown that owning a home is one of the very best financial investments.
When you rent, you are normally limited
on what you can do to improve your home. You have to get permission to make
certain types of improvements. Nor does it make sense to spend thousand of
dollars painting, putting in carpet, tile or window coverings when the main
person who benefits is the landlord and not you.
Since your landlord wants to keep his
expenses to a minimum, he or she will probably not be spending much to improve
the place, either.
When you own a home, however, you can do
pretty much whatever you want. You get the benefits of any improvements you
make, plus you get to live in an environment you have created, not some
Both indoors and outdoors, you will
probably have more space if you own your own home. Even moving to a condominium
from an apartment, you are likely to find you have much more room available –
your own laundry and storage area, and bigger rooms. Apartment complexes are
more interested in creating the maximum number of income-producing units than
they are in creating space for each of the tenants.
If you are moving to a home for the
first time, you are going to be very pleased with all the new space you have
available. You may have to even buy more "stuff."
The Business Cycle and Buying a Home
There are times when the economy is
brisk and everyone feels confident about his or her prospects for the future.
As a result, they spend money. People eat out more, buy new cars, and….
…They buy houses.
Then, for one reason or another, the
economy slows down. Companies lay off employees and consumers are more careful
about where they spend money, perhaps saving more than usual. As a result, the
economy decelerates even further. If it slows enough, we have a recession.
During such a time, fewer people are
buying homes. Even so, some homeowners find themselves in a situation where
they must sell. Families grow beyond the capacity of the home, employees get
relocated, and some may even find themselves unable to make their mortgage
payment - perhaps because of a layoff in the family.
In the business cycle of real estate,
there are buyers' markets and sellers' markets...and some markets in between.
It is all based on supply and/or demand.
and Demand - Inventory
During sellers' markets, homes sell
quickly and sellers have a lot of pricing power. As a result, prices rise more
rapidly than at other times. During buyers' markets, homes may sit on the
market for awhile before selling, so sellers become more flexible and may even
drop their prices.
The market is determined by supply and
In real estate, the relationship between
supply and demand is calculated as "available inventory." At the current sales
pace, how long would it take to sell the total number of houses available on
the market? That is how the real estate industry measures inventory.
Inventory is measured in weeks and
months. Longer inventory times are associated with buyers' markets. Shorter
inventory periods are associated with sellers' markets. Some buyers and sellers
hope to time their purchase to take advantage of market cycles.
Your Purchase to the Market Cycle
One problem with attempting to time your
purchase to the business cycle is that even experts have problems accurately
predicting the future economy. Even when they can, the real estate market does
not necessarily move in tandem with the stock market or the economy as a whole.
Part of the reason is interest rates.
When the economy is doing well, interest
rates are generally higher. The result is that fewer people can afford houses.
When the economy slows down, interest rates fall, the "affordability index"
moves up and more people can afford houses.
As you can see, this cycle does not move
"in sync" with the rest of the economy. It is also influenced by how many
people have jobs, whether they are well-paying jobs, and consumer outlook for
the future. All these factors make it difficult to know, in advance, whether
the housing market is going to boom or bust.
What makes most sense is the "buy and
hold" strategy. Buy a home you expect to remain in for at least seven years or
You Should Not Wait to Purchase a Home
Even if you could "time the market,"
that strategy would most benefit first-time buyers.
You see, people who already have a home
usually need to sell it in order to come up with the down payment for their
next home. Even if they don't, they would have to carry the debt and
obligations on two homes at the same time. This can create financial hardship,
even when you rent out the previous home. There are maintenance costs, renters
don't always make their payments on time, the rent may not cover the mortgage
and other costs, and sometimes the property may be vacant.
So if you are a move-up buyer and want
to purchase your next home during a depressed market, you generally have to
sell your current home during that same depressed market. If you want to sell
during a boom, then you also have to purchase during the same boom.
It tends to equal out.
Finally, suppose you are a first-time
buyer and wait think the end of a boom is near? If you guess wrong, are you
going to wait...and wait...and wait...till the next depressed market? If so,
you could miss out on loads of depreciation...
...and that is assuming you guess right
about your market timing. In 1996, when the home market was struggling, who
would have predicted what the next seven years would bring?
Your Realtor by "Accident"
When someone decides it is time to sell
their home, they interview several Realtors from different companies to
determine which one is best for them. They want someone who will represent them
and someone they feel will do an effective job at marketing their home.
However, when someone decides to buy a
home, they usually end up with their Realtor through sheer accident. Why don’t homebuyers
search for a Realtor the same way that homesellers
Instead, homebuyers usually end up with
a Realtor as a result of answering an advertisement. The advertisement will
give a brief summary of a home available for sale along with the price, but it
says nothing at all about the Realtor.
...does it really make a difference?
Agents and Selling Agents
You see, there are two "sides" to every
sale. The listing side and the selling side. Most deals have an agent
representing each side, so there are generally two agents involved The seller's
side is represented by the listing agent. The buyer's side is represented by
the selling agent (also known as the buyer's agent).
Agents can deal with both buyers and
sellers, but the majority tend to focus their efforts on one or the other. Some
even exclusively handle either buyers or sellers.
So what should you do?
We simply recommend that you take as
much care to hire a real estate agent as you would for any other professional.
Ask questions. Ask about education, experience, and focus.
After all, buying your next house is
probably the biggest purchase you've ever made in your life. Does it make more
sense to find your agent by accident...or by design?
Do You Make
an Offer With the Listing Agent?
For argument's sake, suppose you see a
property that is "just perfect" and you don't have an agent yet? Do you make an
offer with the listing agent?
Well, most deals have two agents
involved. The listing agent markets the house and represents the seller. The
selling agent represents the buyer. The seller pays the real estate commissions
to both agents.
When you make an offer directly to the
listing agent, there is only one agent involved instead of two - so things work
a little differently.
When you make an offer directly with the
listing agent, the agent will disclose the possible working relationships that
exist - whether they are going to represent both you and the seller, or just
represent the seller. There will be a document you sign called an "agency
disclosure" that spells out the relationship.
When representing both sides, an ethical
agent becomes more of a transaction facilitator or perhaps a "dual" agent,
depending on what state you are in. In effect, they are not an actual advocate
of either party but mostly an information provider and communication conduit.
The agent will convey offers and
counter-offers back and forth, but won't provide opinions to one party or the
other on how "negotiable" the other party might be. In addition, they will
answer questions, explain things as the transaction progresses, make
suggestions about whether getting inspections is a good idea - and so on - but
they won't be your advocate or the advocate of the seller.
If the agent discloses that they are
acting just for the seller, then they are the advocate of the seller -- and you
are on your own.
Most real estate transactions go fine,
but almost every one has a challenge or two. These challenges are often
routine, but sometimes not. One party may come out on top in a dispute and the
other may feel that they did not.
When there is only one agent, the buyer
may sometimes feel that the agent took the seller's side in a dispute. Often
the criticism is not merited, but human nature being what it is -
In the end, make an informed decision.
If you are considering making an offer directly to the listing agent, ask
questions. What are you giving up by not having your own agent? What will you
gain by presenting an offer via the listing agent? When you get your answers,
make your decision on what you want to do.
Agents Advertise - Is it What You Think?
Listing agents place ads for several
reasons. First, they need to show the seller that they are doing something to
sell their home. Second, by showing how much they advertise, they can also
attract other individuals who are thinking of selling their homes.
They point to their ads to show their
clients that they are aggressively marketing the property. When other home
sellers constantly see ads from a particular Realtor, they are inclined to want
to list with that Realtor, too. So even though the ads look like they are
directed toward home buyers, they often have another purpose. To
attract home sellers.
What sellers don’t normally realize is
that a listing agent’s true marketing emphasis is directed toward other
Realtors, not the general public. Their main goal is to convince the selling
agents (buyer's agents) to find buyers and make offers. This is a good thing
because if you are selling a home, you want as many Realtors as possible
bringing buyers around to take a look. Most of a listing agent's marketing
efforts toward other Realtors are invisible to the general public, but it is
where an effective listing agent does a home seller the most good.
Additionally, many listing agents now
have "teams." One member of the team will probably be a licensed agent who acts
in the way described just below:
agents (buyer's agents) do advertise homes for sale in order to attract buyers.
Although the ads do market a specific property, they are mostly intended to
attract buyers in general -- not a buyer for that specific
property. The agent would be happy if you did buy the property you called on,
but it happens so rarely that they do not expect it.
What happens when you call on a real
estate ad is that you often schedule an appointment to go look at the
advertised home. While you are out looking at that home, you will probably want
to look at others -- so the agent will show you a few other homes, too.
Eventually, you and the Realtor will zero in on what you need and like in the
proper price range and you will make an offer.
That is how most buyers find their
Realtor -- by "accident."
and Using Your Own Realtor
Actually, the best thing for you to do when you
see an advertisement in the paper is to call your own Realtor and tell them
about the ad. Since addresses usually do not appear in advertisements, your
Realtor will call the listing agent and find out the MLS number for the
property. If the listing is on the internet, it probably already provides the
The MLS number allows the agent to access the
listing directly on the Multiple Listing Service computer. That reveals a lot
more information than what is available to you on the web.
The house may turn out to be a great home for
you, but it may also be a property the Realtor has already disregarded because
it backed up to a busy noisy street and you have told your Realtor you wanted a
You Have to Find an Agent. How
do you do that?
If you're reading this, you're probably on the
Internet. One key to a successful relationship between a real estate agent and
their client is that, in addition to representing your interests competently,
they educate you about the process as it unfolds. So don't simply look for
property on the web - look for an agent that informs you about the process.
Referrals are always a good way to go. Perhaps a
friend, co-worker, or family member recently bought a house in the same
community and had a good experience. However, if they bought a house twenty
miles from where you want to move, it may not be a good idea to use the same
You want an agent who knows the area in detail
and has already previewed many of the homes available for sale in that
community. Community knowledge should be important to you because you are not
just buying a house. You are buying a home in a local neighborhood
in a specific community.
Every Realtor can show you every property
available for sale in the Multiple Listing Service. Since that is true, you can
call any real estate office and find a Realtor willing to show you houses for
sale. The problem is that you do not know if you are talking to an excellent
Realtor or a lazy inactive one.
for an Agent
Your first step should be to shop for a Realtor,
not to shop for property. Shop for a Realtor the way you would shop for a good
attorney, accountant, mechanic, plumber, doctor, financial advisor, or other
Now that we have the Internet, you have more
information at your fingertips than buyers from the past. The web is a good
place to start. There are lots of directories that list agents, plus search
engines, too. Peruse the sites. If an agent has lots of information on their
site and seems genuinely concerned about informing homebuyers, that's probably
a better choice than someone whose web site only talks about how good they are.
The client should be the focus, not the agent. At
the same time, agents have to market themselves aggressively -- or else you
won't notice them.
Imagine that automobiles are sold like real
estate, with no more car lots or dealerships. Both new and used cars are just
parked on the street. So if you want a Ford, there are no more Ford
dealerships. No more Lexus dealerships or any other kind of dealerships,
either. If you want to look for a car on your own, you just drive around and
see what you can find. Even then, you can only look at the outside, because you
don't have the keys.
There are some people that have the keys. They
also have a computer that tells them where all the cars are parked, what model
and year they are, what size engine they have, and how many miles are on the
odometer. They get paid a commission for selling the cars.
Some of these commissioned agents just sit around
and look at the computer, waiting for the phone to ring. Some of them go out
and locate the new cars, physically inspect the interior and exterior, and flip
on the ignition to listen to the sound of the engine. They are interested in
finding the best cars so their customers refer future clients to them.
Who would you rather call?
to Conduct the Search for a Good Realtor
One way to find candidates to interview is to
talk to professionals from real estate related professions and ask their
opinion. If you know someone who is employed as an escrow officer, title
representative, homeowners insurance salesman, or loan officer, they will be
able to recommend Realtors from the area they work in.
If you talk to a loan officer, be sure it is
someone who deals primarily with purchase money first trust deeds and mortgages
instead of refinances, second trust deeds, or finance companies. Since the
latter do not deal with Realtors on a regular basis, they will not know who to
You could just make phone calls to real estate
offices and ask questions. Ask the manager to recommend someone or ask a
Realtor who he/she would recommend from another office. This will be a little
tricky because the Realtor you ask will be "giving away" a commission, but you
will find out who they respect as a competitor.
A new alternative to finding a Realtor is the
internet. Look for Realtors who advertise themselves, not property. That way
you have a pretty good idea you are getting a "buyer’s" agent instead of a
listing agent. Look to see if their web page offers something to you in the way
of information or other services instead of just telling you they are "number
one." You want someone of value to represent you, not someone who is full of
a Good Realtor
When you interview Realtors for the job, you want
someone who will be concerned about you and will take care of your interests.
You want someone who demonstrates ready knowledge of homes available for sale
and does not have to call you back after they "check on the computer." This
ready knowledge demonstrates they have actually been out previewing homes and
don’t just sit around waiting for the phone to ring.
You also want someone sharp enough to ask you
questions as well, including your financial and debt information. By asking
these questions, a good Realtor will be able to determine the proper price
range you should be looking in. By asking about your family, an agent will be
able to tell if what you need in a home is something available in your price
range. You want a Realtor who is bold enough to talk straight with you instead
of always telling you what you want to hear.
a Realtor Asks to Meet With You
Finally, any decent agent will always
ask for an appointment to meet with you, too. It is only natural, since they
earn their living by commissions. However, Realtors are also supposed to act as
your agent, looking out for your interests before their own. You want a Realtor
who takes that responsibility very seriously. If someone seems too much like
simply a salesman, then maybe you should look a little further.