Over the last several years a typical conversation at a cocktail party surrounded the state of the residential real estate market. At first, everyone was discussing the huge gains that they were seeing in their property value and how they were considering purchasing additional homes as investments. Today that style of talk about real estate has changed to how people can't believe how terrible the real estate environment is and how their neighbor's home just went into foreclosure. It is apparent that times have changed in real estate over the last few years, and the people who overextended themselves are now in over their heads debt wise, especially if they became greedy and purchased several investment homes in the peak of the real estate euphoria.
For most people, when they hear the name Warren Buffet they think of a billionaire stock investor. Warren Buffet is considered to be one of the best investors of all time, but he is also well know for taking a situation and breaking it down to a language that everyone can understand. Mr. Buffet said the following about investing, “Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can't buy what is popular and do well. " I know this pertains to buying and selling stocks but what if we applied this concept to real estate. Residential real estate is most definitely not popular right now. People are dropping their selling prices by thousands on a daily basis just to avoid foreclosures or bankruptcy. Using Buffet's ideology, could now be the time to buy your dream home?
The answer to that question for most of us would be no. Especially if you chose to “bridge" the financing by accessing the equity in your current home to use as a down payment on your next “dream home". Realistically you may be carrying both mortgages for 6 to 12 months or more. This is a technique that I strongly advise you not to implement as you are risking your financial future unnecessarily. If you do happen to find your “dream home" a little patience and a proper game plan will save you a lot of stress and many sleepless nights. However, for the few that are financially strong this could be a time to get into their dream home for fraction of the cost.
The following advice may help you consider this opportunity but I need to warn you, you must follow my steps closely because if you take them out of order you may be jeopardizing your long term financial security.
The first step is to place your home on the market at a cheap price. Too many people have their homes on the market and expect to receive the valuation of their home 12 to 24 months ago. This is an unrealistic expectation and in order to sell your home you have to list your home below current market prices. Conduct your research with you local realtor and investigate the available comps in your area. A great website to visit for a free independent valuation of your home's price is www.zillow.com. Find the lowest priced home in your neighborhood and then take an additional 5% off the price. You want to make your home stand out, and if anyone is interested in your neighborhood, chances are they will most likely come see your property. Just because you listed it below the market does not mean you will sell the house immediately, it still may take 3-6 months or more to sell.
Once you have a secured offer on your house, you can begin to look at neighborhoods that you have always wanted to live in but were a little out of your reach price wise. Take your time with this step and be willing to live in a rental for several months until you are certain that you have found your dream home. Once the home has been found you need to conduct more research. Find out how much the current owner paid for the house, what is his or her equity, how many other similar homes have sold like this one in the neighborhood and for how much. Calculate the price you are willing to offer by taking the reasonable fair market price of the home minus the discount you took on your home just to sell it and minus any real estate commissions you have already paid. For an example, if your research has determined that the house is valued at $700,000, you discount your house by $70,000 in order to sell quick and you paid $30,000 in real estate commissions then you should offer $600,000 for the home. This price is of course your starting point and you may need to go up but remember you never know what that other person's financial situation is like and many people are chopping on the bit just to get an offer. In this market place there is no such thing as an unreasonable offer.
In closing, I would like to reiterate that this strategy is only appropriate for the financially secure and it is not recommended for everyone. Uncertainty in any kind of marketplace can create opportunity, all you need is a well thought out plan and as little emotional attachment as possible. Good luck and enjoy your dream home.
Securities and advisory services offered through ING Financial Partners, Inc. Member sipc, 104 Whitsett St. Greenville, SC 29601. Gold & Associates is not a subsidiary of nor controlled by ING Financial Partners, Inc.
Neal Thompson is a registered representative in Phoenix, Arizona who manages the wealth of affluent families and presents non-credit informational sessions at all Maricopa Community Colleges. To contact Neal you can email him at email@example.com
Jacob Gold is a financial advisor who specializes in managing the wealth of many affluent families as well as for corporations. To contact Jacob you can email him at firstname.lastname@example.org
By Neal Thompson and Jacob Gold