Information about buying real estate isn’t hard to find — there’s a lot of it, and it’s not hard to find. When the topic is brought up at a dinner table, for example, you’ll hear opinions from everyone based on what they’ve read, heard or experienced. Not to mention the countless shows about buying real estate. With all this noise, it’s not surprising that many buyers get overwhelmed.
In my experience, it’s best for a buyer to first and foremost look inward at themselves instead of at all of the messages from the outside. They should have an accurate assessment of themselves, both financially and personally. What does their current financial situation look like now and in years down the road? What does their personal life look like now — and how might it change in the future?
This dialogue allows a buyer to be mindful of themselves and their decisions, and it allows for a broker to enhance his or her role as an effective adviser and leader throughout the process. Particularly in a new buyer-broker relationship, a successful real estate transaction can be a stepping stone for future fruitful ventures.
Here are some of the common mistruths that clients might have when we begin working together, and how we navigate these topics:
1. Real estate doesn’t always increase in value for the current owner
The key here is not whether a home appreciates, but over what time frame. We’ve all heard, “Manhattan real estate always goes up in value,” and that might be true. After all, many of our clients who are selling their homes sell for some type of net profit. The sales we’ve been encountering lately where the seller is having to sell at a loss is generally due to timing. For those sellers who outgrew the space, moved for a job or decided to relocate, their real estate did not increase much in value. It may be worth more someday, but not over the course of their ownership.
The buyer must be aware of this and part of our job as seasoned real estate brokers is to inform them on this topic. In our experience, when a prospective buyer has taken a good look inside to understand where they think their lives might be going and what they wish to accomplish, they are less apt to make an unwise decision.
2. Renovating doesn’t always add value
But I see it on TV all the time! People like to talk about their great real estate ventures where they bought a place, fixed it up and made a great profit when it was time to sell.
Our clients should be aware that they might not see every dollar back on a renovation, let alone a profit. Again, this concept of renovating and adding value to real estate starts with the client looking inward at their own goals, needs and wants. Are they doing this as a speculative venture or are they building something they love? How useful is the $75,000 kitchen going to be to your lifestyle down the road?
When bought well under market value and exercising smart choices made on a budget, there can be some value created. Usually, we see buyers make choices that are valuable to themselves and don’t always translate to the rest of the market when it’s time to sell.
3. You won’t always build equity by paying your mortgage
Ideally, it would be great if all clients could pay off their mortgages. That said, we’ve found that many have the idea that they will be paying off a significant portion in a short time because that’s the message they’ve received. With a $1 million mortgage after fives years of homeownership, only about $90,000 of the principal is paid.
With finite capital, some of our buyers might be better served with less equity in their home or a different mortgage structure. Often, we see someone with equity in their home but with little fresh capital to get into contract or close on their next property. Equity built from paying a mortgage is not completely liquid, and there might be other investment opportunities that have a better yield than in a home.
Again, conversations about a buyer’s goals, their time horizon and ambitions might enlighten them for the best use of their capital. These early conversations will set up the buyer for success not only with the current purchase, but also for future purchases and a fruitful working relationship.
Conclusion
My business partner and I have been in the industry for a combined 20 years and have guided first-time buyers to seasoned investors through the homebuying process. We have also bought, renovated and sold our own homes, and our professional and personal experiences have taught us that although there are many truths in real estate, not all are universal and many do not pertain to everyone. What is always true is that a buyer’s first step is to figure out their goals and work with a trusted adviser to seek out the best way of achieving them.
Michael Rubin is a licensed real estate agent at Compass in New York City.
