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Arizona industry appointments update - 1/25/2007
Trade up now? Why a soft market deserves a hard lookBrian T. Larrabee, CMPSreal estate investments
The general media has invested so much ink and airtime into
perpetuating the notion of a housing bubble that it's now time to
turn that to your potential advantage. Just a short while ago, any
buyer had to brave the auction-style feeding frenzy, lick an
envelope, submit their sealed bid, cross their fingers and hope
that their five percent over asking price offer was enough to do it
against the dozen or so other interested parties. No doubt that
makes for happy sellers. However, since we all need a place to
live, don't just about all sellers turn right around and
immediately become buyers? And, if they were trading up to a larger
home, didn't that just mean that they were going to pay up
proportionately higher on their next house to assure they didn't
just render themselves homeless? You bet it did. That brings us to
the opposite conclusion applicable in today's buyer's market, which
is that taking a bit of a perceived hit on your sale means you're
turning around to enjoy a respectively larger bite of benefit on
your purchase.
Given all of the current hysteria, it's easy to lose sight of
the fundamentals. Fortunately, having a market that's cooled to a
more historically normal pace allows you to actually think about
that $1 million colonial before plunking down your cash - what a
concept. For anyone still reeling from the recent figures sprawled
across your television screen, the current national median price is
still above the year-end 2005 figure, and the trend line in
appreciation starting way back in 1963 is where median values have
landed. So rather than a bubble, we have nothing more than a few
good years that brought us back to where the market would have been
if it were to progress at a steady rate rather than in cycles.
Let's look at a realistic example of trading up. Say your
starter home has a respectable two bedrooms, a bath and a half, the
benefit of some sprucing up and a new kitchen that you installed
and would sell for around $500,000 today. While in the heat of last
summer's market, your friendly agent suggested you could sell it
for $550,000. You might be inclined to look at this as a loss of
$50,000. The silver lining is that the house you are interested in
now to shelter your growing family might be reasonably priced to
move at $750,000, and that seller is licking his imaginary wounds
to the tune of $75,000 below the $825,000 he might have sold it for
at the same time last year.
The simple theory here is that of relativity. Not the E=mc2
variety; rather, just the simple fact that 10 percent of $750,000
is more than 10 percent of $500,000. So, if you're trading up in
price, a slower market is the best time to do it because your gain
is bigger than your pain.
There are other factors to consider as well if you have an
abundance of equity in your existing residence; selling for a
little less at least reduces your capital gains tax liability. If
you're single and have less than $250,000 in equity, or married
filing jointly less than $500,000, the opportunity exists for that
money to be released without any tax consequence at all. Since that
money can then be rolled over into your new property or, even
better, invested elsewhere to facilitate diversification and
dramatically boost your return on invested equity, choosing to make
the trade when the market is soft and the tax benefit still
available keeps looking better.
Since purchasing a home is not only a major financial
undertaking but involves a host of decisions relative to all of the
inherent logistics as well, operating in a market that affords you
the time to dwell for a bit on the decision before you actually
dwell in the house is of significant benefit. It's always amazed me
that we actually get to drive our cars before buying them and often
dispose of them just a few years later yet, we're never invited by
home sellers to come spend the night before buying and investing or
leveraging hundreds of thousands of dollars for what could be
decades.
Yet another opportunity ripe for the picking is the ability of
many in the position of having a highly appreciated property to
sell - being able to rent it instead. There are plenty of
homeowners who would like to become real estate investors and
wouldn't take the plunge if they had to go out and actually buy
something for that purpose. Yet if they alter their thinking only
slightly to buy something new to live in and simply rent out what
they already own, it can make for not only a much simpler
transition to that of true investor but a potentially more
profitable one as well.
First, having a comparatively small loan and, at that, one
that's likely to have been refinanced to a low rate over the past
couple of years, it's quite common for the total monthly obligation
to be less than the currently rising cost of renting. Just make
sure there is a good prognosis for renting your house before buying
another. Check with your agent and scan the paper for
comparables.
Second, hanging on until the market digests the current supply
of inventory can add back that extra sales premium that you might
otherwise be walking away from if the property were sold today. As
well, you know the condition of your house and have already had
experience with the actual expenses of maintenance. This is a much
better position to start from as a new landlord than buying an
unfamiliar property. Tax-wise, you still have an effective grace
period to try out your new landlord status, as you only need to
have occupied the property as a primary residence for two of the
prior five years to avoid capital gains tax on the sale.
Effectively, that means you can rent it for three years before
selling and still avoid the gains tax up to your previously cited
exclusions.
There is even greater potential benefit for those who will
choose to proactively manage their equity to free up cash from
their existing properties prior to vacating and renting, then using
only the minimum desired or necessary down payment on their new
home. This not only puts the existing stored equity to work in the
acquisition of another asset, but also provides for an appropriate
acquisition basis important to establish and protect the ability to
maintain maximum tax deductibility on the new purchase. To learn
more about this, read "Missed Fortune: Dispel the Money Myth
Conceptions - Isn't it Time You Became Wealthy?" by Douglas
Andrew.
If all of this isn't enough, interest rates are still scarcely
above historical lows. Making a change when you can still lock in a
low rate adds more fuel to the fire of opportunity. The economy is
good, the stock market is good, unemployment is at 4.4 percent and,
at least recently, oil prices have been on the wane.
Add it all up and it just makes sense, logistically,
fundamentally and especially economically. Then again, if you
happen to like auctions and licking envelopes, you could wait until
everyone else is ready too.
Brian T. Larrabee, CMPS is a 27-year veteran of the real
estate industry and is co-founder of Estate of Mind Inc., a
publisher of educational tools for the mortgage industry. He may be
reached by e-mail at [email protected] or visit
www.estateofmindcharts.com.
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