One of the toughest parts of buying or selling a home is the fact that you’re doing a business deal that involves something so personal. It can be difficult to separate the emotional aspect of where you’re going to live with the fact that you need to make a smart decision on what is likely the biggest investment you’ll ever make in your life.
Fortunately, there are people who make this kind of investment their business to show us how it’s done.
Real estate investors of all levels make a living out of buying, selling and owning property, both commercial and residential, and they better understand the nuances of real estate deals than the typical homebuyer or seller who will only go through the process a few times during their life.
Any property purchase is an investment of your money, regardless of whether you’re planning to live there yourself or make money off it. You want to be able to make a profit when it comes time to sell your home again, or at the very least get back what you originally spent. Here are key strategies from real estate investors that you can adopt to make your personal investment a success.
Assess the risk. Before you spend your savings on a down payment and lock yourself into monthly mortgage payments for the next 15 to 30 years, assess the chances the property will be worth the purchase price when you decide to sell.
Look at the home you’re purchasing in the context of the bigger picture: the city, neighborhood and even the traffic near the property. And if the property is affected by negative factors while you live there – maybe it’s in a declining neighborhood with an increasing number of vacant houses or the county decides to take a piece of your property to widen a road – are you able to take the hit on your home’s value?
Any monetary investment comes with risk, explains Harmel Rayat, a Vancouver, British Columbia-based real estate investor and author of “Winning With Commercial Real Estate.” “It comes with things you can’t control,” he says.
Rayat says a great example is his own home, which he purchased about 20 years ago. “I bought it in a great area, paid a very healthy price for it, and a year and a half later my home was down 40 percent,” he explains.
An international political situation lowered interest in the area of Vancouver where the property is located, and as a result home values dropped. While the area has not only recovered but significantly increased its value and interest, Rayat notes it took a long time to get there – and had he opted to sell after 10 years there would have been little profit.
It’s essential to understand the risk you’re taking on before making an offer. If you’re putting your entire life savings into a down payment and you know you’ll be stretching your money simply to make mortgage payments, taking a leap on a home that may not pay off could leave you underwater.
While risks can pay off big – like buying in an up-and-coming neighborhood or purchasing a home sight unseen – there’s no harm in selecting a house you’re more confident in.
Know the market. To calculate the potential risk factors involved with the home you’re considering, you have to know and understand the local market – or bring in someone who does.
Because you’re not in the business of buying and selling on a regular basis, having a real estate agent who can explain the nuances of homes and values in the area is imperative to bring you to the level of understanding that most real estate investors already possess. A knowledgeable agent should provide insight on the variation in cost based on certain features, like the number of bedrooms or an updated kitchen, as well as manage expectations for a competitive pool of other interested buyers.
“Making sure the agent knows that micromarket [is key],” says Tom Pietsch, managing partner and broker associate with Tom & Cindy and Associates at Long & Foster in northern Virginia, who works with homebuyers, sellers and real estate investors.
Making an offer is a decision only you should make, so select an agent who can help you understand the market in relation to your needs and the available properties, and then assess your options from there. That means considering the local school district, transportation, community amenities and more, explains Fred Cooper, senior vice president of finance, international development and investor relations at home building company Toll Brothers.
“Homebuyers should not only analyze the specific property they’re buying, but look at the ancillary aspects of the community that they’re moving into,” Cooper says.
Be realistic when it comes time to sell. Your understanding of the market is important again when it comes time to sell your home. Regardless of the sale price you were hoping for when you purchased your home, you have to accept what comparable sales in the area tell you.
“Successful investors understand the dynamics of the local property market, so that allows them to be realistic in their expectations of what they can sell for and what they can buy for,” Cooper says.
He adds that it is important to recognize any parts of your home or the area that may not be appealing to buyers, and set the listing price accordingly to ensure the property is still enticing to them.
“Pricing the property realistically is going to make it a lot easier to sell it,” Cooper says. And with information about the market easily accessible online through sites like Zillow, realtor.com and even public record databases, there’s no reason to make an uninformed guess at what your home is worth compared to your neighbor’s. By viewing comparable properties that recently sold and researching the value of certain updates versus others when it comes to home sales, you can find a more confident price point for your home.
Your feelings still matter – but control them. When you’re making a decision about where you’re going to live, there’s no way to extract emotion from the equation – something that’s not as difficult to do in investment deals. “How do you remove emotion from one of the biggest decisions in life you’ll ever make?” Rayat says.
But being able to control those emotions can make the business aspect of the deal smoother, especially when you’re selling.
“It’s undeniable that emotions play a role in everything that involves spending money,” Cooper says. “For a homebuyer, and also for an investor, I would caution against blowing up a deal over small things.”
Rather than holding out for an extra $50 in rent, a good landlord will recognize the value in having a tenant occupy the home instead of paying to keep a vacant space and hoping to fetch a higher rent down the line.
Pietsch says real estate investors who rent out a home they previously lived in often exhibit detachment. “Those people tend to then move on emotionally because it’s not their house anymore and try to keep it looking good but for the least [money] they can, while getting the most that they can in rent.”
Recognizing the home is no longer yours once you put it on the market can remove your emotional attachment and help you focus on how to appeal to the new buyer’s feelings.
“Turn your home back into a house. On the other hand, think about the buyer’s emotion, and do what you can to appeal to that emotion,” Pietsch says.