One More Real Estate Fundamental: Go Long

In my last post, I discussed some of the fundamentals of home buying and how one should pay particular attention to them during times of economic uncertainty, such as those we have been experiencing. Let’s examine one more fundamental today.

The ebb and flow of markets — whether they are equity or housing — relies partially on the long and short-term motivations and objectives of individuals. We have seen recent articles about financial advisers and equities brokers cautioning their clients not to panic and to keep their eyes on their long-term goals. But motivations differ: a young, single person at the beginning of a career with a new 401(k) will not have the same goals as a middle-aged couple looking to pay for their kids’ tuition or an older person making plans to retire. And individual investors tend to act emotionally, generally reacting to how the Dow behaves, rather than to macroeconomics.

And few business transactions and investments are more influenced by emotions than home sales. Buyers and and sellers are motivated by the idea of a home and what it’s worth. Much of my job as a real estate broker is knowing how to deal with people, understanding what is important to them, adapting to their individual communication styles, and helping them help themselves. The most difficult sellers tend to be those who have been in their homes the longest and/or are undergoing life-changing events like divorce, death of a spouse, or retirement. Understandably so: They’ve had their lives wrapped up in the house, a symbol of stability, and it probably represents a major portion of their nest egg.

So one fundamental to add to the list in the last post is to go long. Think long term. For new buyers, I greatly caution against thinking of home buying as a “property ladder,” beginning with that dreadful real estate term, “starter home,” which seems symbolic of the boom-bust years: buy this house, watch it appreciate, take out equity, improve it, or just go ahead and sell for your rightful return on your investment; buy another, larger house with a big mortgage, and so on. Did our grandparents think this way? No, in most cases, they bought the house they were going to raise their families in, paid off the mortgage, and collected cash when they were ready to retire. Now, I’m a real estate agent. I get paid on the transactions, so I don’t want to kill my business by saying to buy and hold forever. But let’s not veer to the other extreme. Never over-extend, and do not count on your home being the best investment, especially in the short term, which is anything under five years. It should be first and foremost a place to live.

For sellers, think long-term as well. Don’t get hung up on what your neighbor’s house sold for last year. Every time I hear that from sellers, it turns out that their recall is faulty either on the sale price or year of sale. It is more important to look at the value the house has given you, what you paid for it, how much equity will be left after a realistic 2011 selling price, and your return on your initial investment, minus improvement costs.

But not to be forgotten: your house has been your home and not a mere investment property. You must factor in all of the dividends it has paid back to you, starting with using it as a place to live, sending your kids to school, forming social bonds, and so on.