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Your Questions, Your Money
  • August 13, 2009 01:51 PM UTC by Dagen McDowell

    Five Real Estate Lies That Will Not Die

    I still hear them every day: Fallacies about buying real estate and putting money into property after you already own it.

    The other day I was watching one of those ubiquitous real-estate TV shows when I heard a realtor say something you don’t hear often enough: “You shouldn’t install granite counters into this home because no other homes at this price range in this area have them.”

    Hallelujah. Amen. And then some.

    Nevertheless, there‚Äôs still so much bad bubble-era advice being doled out about real estate. Well, the following is not fact. It’s fiction.

    1. Buy as much home as you can afford. Even after the breathtaking three-year decline in home prices, I still hear this mantra over and over. This line from a well-known TV realtor continues to ring in my head: “You qualified for a $295,000 mortgage and you should spend that.” When the budding buyer protests, the realtor responds with a curt, “You can’t get what you want for less.”

    The home shopper is worried about going too deep into debt and the realtor wants her to party like its 2005. And we know all know how long that hangover’s lasted.

    Here are the two reasons NOT to buy too much house. You could lose an amount of money that you cannot afford to lose. Yes, home prices can decline. Because homes are bought with large amounts of leverage, a small decline can wipe out your entire investment and then some. In buying too much house, that loss will be too great as a percentage of your income and savings.

    Two, the minute your income declines you bought MORE house than you can afford. As soon as someone takes a 20% hit to their pay (easy if you’re in a commission-based job) or suffers a job loss, that house payment becomes beyond your means.

    The basic concept of buying a modest home over renting is sound because of the forced savings. But overreaching and buying too much house is not wise. A bigger home is not a better investment.

    2. A dollar in renovations can add a dollar or more in home value. When is this true? When you’re Jasper Johns and you go to the art store, spend $50 and paint a mural on the wall of your house. Otherwise, renovations don’t magically add value to a home.

    The renovation itself is a depreciating asset: It will lose value over time. If it’s depreciating, how is that an investment? How quickly a renovation depreciates is another matter. Eventually, all that granite will be as dated as Formica. In several years, those stainless steel appliances might as well be avocado green.

    Frankly, bad renovations are a liability. The buyer has to remove and replace them.

    During the housing bubble, renovations did appear to add value. Now they might make financial sense if you do all the labor yourself. But when home values were climbing by double-digit percentages every year, almost all renovations looked like they made money simply because prices were rising. If you did nothing, you probably also made money. People overvalued their improvements and underestimated the overall bubble trend in prices.

    Renovations also made sense during the boom years if the person buying a house was getting a mortgage with no money down. They couldn’t borrow additional money to make improvements. So the ones made by the seller did make sense. At least then they did.

    Another issue is taste. That brand new kitchen or bath will rarely match the exact taste of a prospective buyer. As a buyer I would rather pay less for the house before it’s renovated, take the dollars I saved and redo the house to my taste. I am thankful that my 1965 modern ranch house still had the original bathrooms and kitchen in it. I would not have been willing to pay up for someone else’s work, which surely would’ve included stainless, granite and neutral colors in everything to make the house more appealing to the average buyer. I say, “Long live my Frigidaire Flair.”

    3. Your house is what you paid for it plus what you put into it in renovations. See above. People are still trying to price their homes based on what they paid and what they spent to fix it up. “I’ve got $280,000 into this place, that’s what it’s worth.” In a declining market, this thinking should be thrown out the window.

    4. You “lost” if another bidder wins the house. This is a realtor tactic to gin up a bidding frenzy for a home, which leads to a sale and a higher commission for the realtor. The advice is: You must up your bid to beat all other potential buyers to win the house of your dreams. But it’s not a good thing necessarily that you possibly overpaid for a home. Some realtors act like you lost if someone pays more for a house that you were competing for. You don’t “win” if you paid way too much. Somehow it’s smart to be the highest bidder?

    5. Don’t insult the seller with a low-ball offer. This only applies if the seller is your sibling and you’re worried about family fights over the holidays.

I am a realtor and a contractor. (got my license in 2007 and everyone that found out that i was crazy getting a realtors license in the downturn) I agree on the 1. When i was looking to buy a home in 2006, after a few houses my agent started pressuring me and i almost started feeling guilty for wasting his time. Then i thought to myself "this is the biggest investment i'm gonna make to date.." no more guilty feeling.... :) Number 2 though i would disagree there are different cicrumstances, I'm installing granite (3cm) counter tops in my kitchen even though no homes in my price range here in Seattle have them. I'm installing a nice kitchen from Chine ;) that looks like a 15k kitchen from Home Depot. All in all it's costing me 5000,00. Even though no in my price range have them, think about it - a young couple (first time buyers) visits a house thats a 1978 built with all original in them (no upgrades) thats for sale for 235k and visits my 1978, with tile, travertine in bathrooms, hardwood floors/stairs (brazillian cherry) slate entry, nice 3cm countertops in the kitchen and the house is listed at 235k also. Which house are they more likely to write an offer on, generally speaking? My parents did a flip july 2006. Right before the market crashed, their house sold, because they had a few "extras" in them that made their house stand out within their price range. After all, what's so special about granite in a $1,000,000.00 home? They all have them

September 18, 2009 at 2:07 am

THANK YOU, I get so sick of watching these home shows and seeing first timers whine because the house doesn't have granite or is smaller or is the wront color, or doesn't have stainless. I recently purchased a home, a small modest home that i could afford. The countertops are ugly, but thats fine. My friend said I should put a granite slab in the kitchen. I looked at him and said 6k for a slab, in this neighborhood is just plain stupid, they are all starter homes from te 1920's. A cheaper alternative is to use a granite tile for the tops. You get a similiar look without all the cost. Total cost to do them will be roughly 300 dollars and that includes renting the wet saw. people want everything shiny new and don't want to work for it, everyone has an entitlement problem, my philosphy is that I've never been entitled to anything of material value, you want it WORK FOR IT. But, dont come to me and complain when your interest only arm resets and you can't afford it.

August 18, 2009 at 1:21 pm

Please add "Lie #6" ... "You picked me to be your agent & I'm working for you!" THE AGENT ALWAYS WORKS FOR THE SELLER!!!

August 18, 2009 at 9:46 am

Five real estate lies « David Kirkpatrick

[...] home renovation, prevarication, real estate — davidkirkpatrick @ 4:41 pm I’d say this article may currently be a case of good advice coming a bit late in the game, but real estate is cyclical and a new buying frenzy is coming someday. Maybe not [...]

August 17, 2009 at 5:41 pm

Studio TV-15

Your five "lies" make perfectly square sense. Anyone who spinelessly succumbs to these whoppers has no business sitting in a Realtor office. We bought a house in Florida in 2002 when all you needed to buy it was a pen with some ink in it. "Sign here!" They were gorgeous new houses (750 of them) being built on a golf course ranging from $125,000 to $395,000. Upgrades, of course, were extra. Rather than going with flow of the time and putting nothing down (or 5%) we handed over a 20% down payment to avoid the PMI (money grab!). You should have seen the sales office, though! People were filing in as if the sign out front said "Free Gold Inside"! The developer (Ryland) was doing incredible business, writing its own mortgages and shortly thereafter selling them to Countrywide. The subdivision sold out years ahead of Ryland's projection. It was wild. We sold our house in 2006 at nearly twice what we paid (the bubble was on the verge of bursting). We took our profit and placed a healthy down payment on a home in NJ. Our house value today has eroded nearly 70% of that down payment. We're not, though, upside down. The point of all this? At no time did we fall victim to the onslaught of advice and sales tactics that would have jeopardized our fiscal stability. Needless renovations, excessive home size, "buy now" pressures ... all of the points you made are key to successful personal management. They say intelligence is the ability to recognize reality quickly

August 17, 2009 at 4:43 pm

Thank you Dagen: When my wife and I bought our first house in 1986 the first realtor wanted us to buy twice as much house as we wanted. We said No! We want a life apart from our house. When we redid our kitchen and bathrooms we did them to our taste. We like them and we have no granite anywhere and our appliances are white. Your were preaching to the choir here, thank's. Mike

August 17, 2009 at 4:18 pm

I am a realtor... Some of your advice is right and some is wrong. Sorry, it amazes me how many people think that real estate every where is the same. It is not. Markets vary from city to city and believe it or not.. some areas are rather "hot" at the moment. Items 1, 2 & 3 are right .. You should know what you qualify for but the real ksy is finding a comfort zone in your payment amount and then be realistic at the price range you are looking. #4 maybe, maybe not.. depends upon your market area. If you have been looking for several months and have submitted several bids and are continually losing... then you are bidding too low - understand the market conditions. Not all realtors try to up your bid to make a bigger commission. That's like saying all reporters make up stories so they have something to write about. #5 The reality is - you can insult a seller and if you really like the house don't low ball the bid if it is not warranted. Research comparables in the market and bid accordingly, if you can properly justify your bid it will go along way to helping you in the negotiation stage. I have seen sellers insulted by a ridiculous low bid (like gordon dukes post) and were not willing to consider a 2nd bid from a buyer. The reality is ... be smart. Understanding your market conditions will go a long way to helping you achieve your goals

August 17, 2009 at 3:42 pm

My friends used to say I was weird when I said these same things 10 years ago. I may qualify for the loan, but I still have to make the payments I would say. Unfortunately, people don't have much sense and will again buy more house than they can afford as soon as the banks lend them the money to do it. My "average" house is almost paid for and I fully intend to stay in it. After that I will buy real estate only as I have cash to buy and pay for it in full.

August 17, 2009 at 11:46 am

H Toddstein

Great article! My wife and I went against some of these "lies" when we bought our home during the last economic downturn, and we drove real estate agents crazy. Our loan was only 65% of what we qualified for, and we took our time and low bid on homes based on what we could afford, and ended up buying a house 20% below what it has listed for. Despite income fluctuations we've never have a problem making the monthly payment and paying down the mortgage at at faster rate because of this. Another lie the agents kept trying to push on us was "you're spending too much time looking at houses, if it turns out you don't like it you can always sell it in a few years". Yeah, right!

August 16, 2009 at 11:57 pm

Adam Krolnik

Re: I'd rather do my own renovations. Unfortunately, you and I are in the minority. We've seen people not like houses because of the color of the rooms. We've seen people not like houses because the kitchen wasn't as updated as others (at higher prices.)

August 16, 2009 at 6:11 pm

Excellent article. Housing prices in the crime-infested, low-income city in which I live rose more than 40% from 2003-2008, but there has been a downward correction of only 2% since. What gives? Has anyone looked into the possibility of collusion among real estate agents, mortgage lenders, appraisers, and county assessors to artificially inflate prices in some areas during that 2003-2008 time frame?

August 15, 2009 at 7:07 pm

Rich Harris

How about "Buy all the house you can afford AFTER you have maximized your 401k, IRA, emergency fund and charitable giving, and after you have paid off all other debts and helped your family and friends." If you buy "All the house you can afford" within those guidelines, you will probably be at about 10-15% of monthly income and will come to see that the extra security feels better than the extra style or square footage ever could. Of course, the short version of all of this is just "Don't buy a security system for your henhouse from Foxes, inc."

August 14, 2009 at 4:08 pm

Walt Edge

Dagen, 4 out of 5 is not bad you will insult a seller if you offers a crazy low ball offer. I'm selling my house not giving it away. Your realtor has done a marekt study and they want to sell your house as nuch as you do but but 9 times out of 10 if a buyer makes and offer 20% or lower than the asking price they will not even get a response from the seller. Do not insult the seller there is room to give but low balling is insulting!

August 14, 2009 at 10:31 am

Corey in GA

1. This only made sense with homes appreciating combined with the tax exemption for mortgage interest. You're spot on that this is a ridiculous assertion in this market. it should be, "Buy as little as you can make work and save for later." 2. For dated stuff, leave it, but fixing damaged items will pay back even if there's a taste issue. Even some taste renovations make sense. Turning off a buyer on a $250,000 house based on the lack of a $2000 renovation does not make sense. As yo pointed out, paying $2500 over a 30 year mortgage is much easier than paying for a $2500 update just after buying a new home. (Especially if you bought as much as you could afford! :-) ) 3. Your house is worth what you can sell it for in ANY market! If you paid $180, put in $50 and can get $500, then it's worth $500, not $230. If you can only get $200, it's worth $200. 4. Agreed, but it's ironic that you quoted "lost" and then used the wording "if another bidder wins the house" with no quotes on "wins". 5. Definition of "low-ball" is critical. 40% off listed price (per Gordon's comment) is a bit overboard. 20% is low-ball but could be reasonable, especially in this market.

August 14, 2009 at 10:04 am

gordon dukes

Dagen, Love ur logic but I find it ironic that people offer me $345,000 for a listed $585,000 new lake house here in GA. You can barely buy a lot for that price even now. I'm not insulted....I just don't like wasting my time answering every question on the planet to a realtor/owner that thinks this is ok. Surely they realize that if I could sell it for $345,000 I would list it close to that...PLEASE!

August 13, 2009 at 3:09 pm

Thank you, it is amazing that these facts are not obvious to people. It looks like I might find time out of my weekend to catch your show.

August 13, 2009 at 3:06 pm

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