Top 3 Real Estate Myths for Home Sellers

Guest Post: Tre Pryor, oldest of Sound Mind Investing Editor Austin Pryor's three sons, is a Realtor® residing in Louisville, Kentucky. He is also the Editor-in-Chief of the LouisvilleHomesBlog.com where visitors can get targeted real estate news and advice for home buyers and sellers in the Louisville area.

Because there is so much information concerning the housing market flooding our lives these days, it's more important than ever to distinguish the truth from the myth. Whether myths about foreclosures or myths about home improvement, you should be informed—or team up with an a Realtor who is.

Myth #1: Sellers should price their home higher than market value to allow for negotiation room.

When the market eventually tilts toward the seller's advantage, this would be good advice. But in today's buyers market, there is a huge selection of homes and competition is fierce for each buyer's attention.

Today's buyer looks at an average of 12-18 homes before writing an offer. If a home seller prices his house above market value, that home may not "make the cut" to be one of those dozen or so homes that a buyer will visit in person. The longer a home is on the market, the greater the perception that the home is unwanted or undesirable. The thought process is, "Don't the best homes sell fast?"

Best Strategy: Get a solid Competitive Market Analysis (CMA) from your Realtor and price your home at market value. New listings have the most showings during the first 60 days. After that, traffic drops off considerably.

Myth #2: Selling a home For Sale By Owner (FSBO) makes the homeowner the most money.

There's a reason why Realtors are more valued than ever. The market grew tougher and the number of homes sold by their owners dropped to the lowest level in years—just 9%. Only eight years ago, 14% of all homes sold were FSBOs. (This includes transactions involving parties that knew each other, such as a parent selling a home to a child.)

Selling via this method is extremely difficult. In today's real estate market, expertise is needed to best evaluate, price, and promote a home to get it sold. It's also important to remember that if the homeowner doesn't have a firm grasp on the true value of their home, they could accidentally underprice the property and lose money.

Lastly, most buyers understand what FSBO sellers are trying to do ... save money. So when writing an offer on a FSBO property, home buyers are more likely to "low ball" and try to take a share of that unpaid commission for themselves.

Best Strategy: Find an experienced Realtor. Ask trusted friends/family for referrals and search online for top agents.

Myth #3: Don't update the home, just drop the asking price.

Remember when I said it was a tough market for home sellers? Yes, it's still true. The goal for every online listing, virtual tour, or property profile is to get a buyer in the home. But they won't come if the home doesn't look appealing in the photos.

For example, replacing some old, dingy carpeting with brand new flooring does a couple of things. First, it removes a big negative and possible hindrance to a showing. Second, the update is now something that can be promoted, which encourages a possible visit. It's a win-win!

The classic real estate saying that what sold a home was, "Location, location, location!" In today's real estate market, it's more likely to be "Condition, condition, condition!"

Best Strategy: Ask a trusted realtor which updates will give your home the best bang for the buck. Example, replacing your front door continues to rank the highest return on investment for home improvements.

The #1, best, top, absolute greatest spending decision we ever made

It was 2003. I had a job doing development work for a non-profit, and my wife was in charge of an operations department of a trust-company. In an effort to focus on debt-reduction, we had lived in an apartment since getting married. But our son was getting older, the apartment seemed to be getting smaller, and we were getting anxious to become first-time home owners. And since we had made significant progress on our debts, we felt we were ready.

While my job didn't pay a ton, it could help us afford the essentials. My wife made decent wages, and we had good insurance through her job. So between the two of us, we were doing all right. Our apartment was in a good school district, so we wanted to stay in the area. We both had been in apartments since around 1993, so having our own space and a yard were important to us (and the thought of a garage was sheer bliss). Other than that, there were many questions still to answer.

Should we get brick or vinyl? Ranch or 2-story? Quantity of space or quality? These, among other factors, are always a consideration. But there was a bigger factor at play here: cost. And this is where home buyers can get in trouble, buying too much house.

You see, at the time, lenders were asking, "How much house can you afford?" with the implication being, however much you can afford is what you should buy. And that becomes the dominant factor in the buyer's mind, "How much can we afford?" This was and still is the WRONG question to ask.

I'm not sure why this mindset doesn't permeate most all of our other spending decisions. I mean I'm glad it doesn't, but why not? When you're at a restaurant, do you order based on what you can afford or on what meets your goals of taste, appetite, value, smell, nutrition, and so on? You don't likely open a menu and say, "Because I can afford the lobster, that's what I'm getting. Yes, I'm allergic and I'm gonna swell up like a tick. And no, I don't like eating giant, wet bugs that reek of salt and death. But I can afford it so by golly, I'm getting it." While cost may somewhat dictate which restaurant you visit, my point is that it's not your primary basis for what you order... or at least it shouldn't be. You should base it on your goals.

So when it came to our first house purchase, we asked not what could we afford, but what could we spend and still be in line with accomplishing our goals. What were our goals?

• Eliminate remaining debt.
• Continue to increase our giving each year.
• Send our son to a Christian school.
• Allow my wife to stay at home if she desired.
• Getting a house big enough to allow for more children but not so big so as to be too much to manage.

So we turned down bigger and nicer houses in bigger and nicer neighborhoods. Instead, we found a great little house in a great little neighborhood that allowed us to work toward our stated goals. We bought a house that we could afford on just my income because that was the single biggest factor in allowing us to work towards ALL of our stated goals.

And why was that the best spending decision we've ever made? Because literally two hours before the closing on our house, I lost my job. Two hours and totally out of the blue! Just like that, our income was cut by about 40%. And it would stay that way for the next nine months, until I came back to work for Sound Mind Investing in 2004. But we would be okay on just my wife's salary because we bought the right amount of house.

Why else was it good that we bought what we did? Because it allwowed Kim to become a full-time stay at home mom in the summer of 2006.

Why else was it good? Because we were able to get Jordan into the school we wanted.

Why else was it good? Because we eliminated all of our debt (minus the house itself) while in that home.

Why else? Because we were able to keep increasing our giving.

Notice a pattern? We were able to accomplish our goals because we spent money with our goals in mind. We didn't let the ability to spend dictate our decision (this kind of access to credit is a temptation that so many fall into when it comes to credit cards. If it's a temptation to you, ask for a lower credit limit or switch to a debit card).

So where does that leave us now? Well, for one, that first house became our first rental house. Being a landlord was something I had always wanted to try. If we had bought a bigger house, it would have been much harder to rent it. This was the perfect first house for us and the perfect first rental for us.

What else? We're due for our 4th child this week. Kim has been at home five years now and there's no place I'd rather her be.

And finally, most importantly, we're able to feel the Father's pleasure by giving freely and with great joy to causes that are on our hearts.

So when it comes to spending, spend with goals in mind. Practice the #1 way to save money on nearly every purchase and focus on what you can control by not letting the availability of money be the driving principle for your spending decisions. Don't order the lobster just because you can!

What about you? What the best spending decision you ever made?

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Tag(s): christian finances, family finances, mortgage, spending, stewardship

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My first year as a landlord

A year ago, my wife and I took advantage of the slumping housing market and bought a house at nearly 25% less than it sold for brand new just a few years before! (The person living there had a job transfer and his employer more or less owned the house, so we got an incredible deal.)

We decided not to sell the old residence because questions occurred to me: 1) Would we also take a huge hit when selling because of the depressed housing scene? 2) Would this be a good time to rent our old house?

Because I had wanted to try my hand at an investment property for some time (and because we were in a position to buy a new house without needing the equity from our old house), we decided to take the landlord plunge. We closed on our new house on March 30, 2010, and the tenants took up residence in our old house two days later on April 1.

So how has it been? Quite good actually, but that's not to say I won't do a few things differently when this tenant moves out eventually.

Here are my top four changes for the next time around:

1. I will represent myself as the property manager, not the property owner. I would like to keep a perception of separation between business and personal life. This is not to say I would lie if asked if I owned the property, but I would just refer to myself as the property manager.
2. I will not give an option for a multi-year lease. Since this was my first time as a landlord, it gave me some comfort to think the tenant would be there for several years and I wouldn't have to go through the process of finding a new tenant any time soon. In fact, in return for the multi-year lease, I discounted the rent.

   In hindsight (and because of advice from other real estate investors), I wouldn't do that again. I found out that most renters will stay longer than a year anyway, so by discounting the rent, I shortchanged myself. Plus if I ever had a difficult tenant (but one who was not actually violating the letter of the lease), I would have a tough time getting rid of him.

3. I will require that the renter hand over 12 post-dated checks for the rent up front. Rather than relying on the rent to be deposited (or mailed to me), I will require a years' worth of rent checks, each dated the 1st of the month, January through December. This puts the burden on me to make the deposit each month, but also serves notice to the tenant that he or she better have the funds in the bank.
4. I won't assume the rental property will result in a tax deduction. I had heard that one of the great things about rental properties is they provide great tax deductions if you itemize (or at least that's how I understood it). That may be true if you're not profitable, but I was. The rental income exceeded the expenses (repairs, mortgage, depreciation, miscellaneous). So at the end of the year, because it generated a gain (even though the gain was reduced by the expenses), my rental property increased by tax burden, rather than decrease it. (This year, I'll be sure to set aside a portion of the income for tax time in 2012!)

That's essentially it. I might add a few other smaller stipulations in the lease, but these four are the big ones.

My experience in year one has been positive overall. There have been a few small incidents, but the time it's taken me to resolve them has been well worth it. And in most months, I have spent no time at all on the rental, other than checking to make sure the rent was deposited. In other months, such as when I had to replace a faucet or do tree maintenance, I may have spent three to four hours.

Now just for fun, let's crunch some numbers to see what I'm "getting paid" to rent this house. (For simplicity sake, we won't include the income it generates — it's too hard to predict because some years will have more expenses than others, like when I may have to replace a roof or HVAC.)

All told, I probably have averaged about an hour a month on the rental. The mortgage has 24 years left. So 12 hours a year times 24 years is 288 hours. If the house appreciates at 4% year, it would be worth $550,000 when the mortgage is paid off. However, we lived there for seven years before we rented it, which gives us about $100,000 in equity. So what does this look like per hour?

($550,000 - $100,000)/288 = $1,562/hour

Not too shabby.

Are home buyer resale warranties a good idea?

We moved in the spring, and it seems like the move has created as many questions as it answered: What should I do with my old stuff, sell it or trade it? Which digital services do I really need at the new house? Are mortgage-savings programs a good idea?

The newest question is whether or not to get a "home buyer resale warranty" (not to be confused with a home warranty offered by a builder). If you're unfamiliar with these, they're more or less a service contract on various components of your house, such as appliances, HVAC, and water heaters. They are usually considered at the onset of a relocation, but many can be purchased at any time.

The one we're being offered is by American Home Shield. It costs $356/year for the basic plan ($512/year for the "Enhanced Plan") and works like this: when a covered item breaks down, you can contact them by phone or online and request a service call. After the request is processed, one of their "approved and insured contractors" will come out to diagnose and fix the problem. The cost for this "Trade Service Call" is $60.

Sounds reasonable, but let's look at some of the fine print:

• "This Trade Service Call Fee applies to the initial visit by a contract for each covered trade. This initial fee covers any additional contractor visits required for the same breakdown within 30 days of the original service date. Additional charges may apply for some repairs and replacements."
• "... Warranty covers the repair or replacement of many system and appliance breakdowns, but not necessarily the entire system or appliance."
• "... may provide cash back in lieu of repair or replacement in the amount of AHS's actual cost to repair or replace such item, which in most cases may be less than actual retail pricing."
• "... [items needing to be replaced] will be replaced with units having comparable features, not necessarily the same dimension, color, and/or brand."

Hmmmm... you thinking what I'm thinking? That's a lot of fine print. Let me see if I've got this right:

My two-year-old $1,100 Kenmore stainless steel 3 x 3 x 6-foot side-by-side fridge is acting wonky. So I call, a technician comes out to "fix" the problem and I shell out 60 bucks. 31 days later, it's acting up again so I reluctantly make another call. After parting with another $60, tech tells me it's unfixable.

I call AHS and they give me two options: I can either have the $600 it would cost them to replace it with a "comparable" fridge, or they'll deliver me a brand new 2.5 x 3.5 x 6.2-foot Hotpoint bottom-freezer... in bisque.

This is a real possibility.

So let's do the math: $512 for the Enhanced Plan (basic plan doesn't cover refrigerators) + $60 + $60 = $632. So in essence I've either payed $632 in order to get $600 (which isn't usually a good deal) — OR — I paid $632 for a fridge that doesn't match ...have the same features... or fit (which is arguably an EVEN worse deal).

Of course, while this is a possibility, it isn't a certainty. Instead, he could have fixed it the first time he came out and I could have no more problems the rest of the year.

Then I'm only out $572 ($512 + $60) for a repair that, according to AHS's literature, averages $157. In that case it would have been worth it because I... wait a minute... no... no, it still wouldn't have been worth it. I just flushed $415 down the toilet!

And speaking of toilets, the average cost to repair one is $70 and the average cost to replace one is $285. So if my toilet broke instead of the fridge, I just paid $572 to have an old one fixed when I could have spent the same amount and bought TWO brand new ones!

So you can see, the fewer things that break, the more "expensive" this coverage is. If you really want to get your money's worth, you need a lot of things to break. I don't know about you, but I'm not big on rooting for my house to fall apart so that I can get my money's worth out of a warranty. Come to think of it, kinda sounds like insurance... EUREKA! Call it a warranty, call it a service contract, call it whatever you want, but we've discovered the truth: it's just another form of insurance.

Nothing wrong with insurance as long as you know that's what you're getting. So back to my original question, are these warranties a good idea? If the seller pays for it, then sure, why not. But if it's coming out of your pocket then consider the age of the home, its various components, and what exactly is covered in order to make an informed decision. Again, pay attention to the fine print.

In our first home we chose to get one because we were first-time home buyers and it gave us a little peace of mind (which is, perhaps, the biggest selling point). But when we had a plumbing issue within that first year, since it had to do with pipes outside the footprint of the walls, it wasn't covered (said it right there in the fine print and a customer service rep confirmed it for me, unfortunately).

So will we get a "home buyer resale warranty"? Doesn't look like it. The home is only four years old and we have adequate savings to cover any breakages that would have been covered by the warranty. What we could do each year is put the contract fee (or premium, pending how you look at it) in a separate savings account just for home repairs (not unlike what I suggested for pet insurance). That way if we need it, we'll have it. And if we don't need it, at least we didn't wash it down a drain that never needed fixing.

An "easy" way to reduce your mortgage

Wanna get out of debt? Start by looking at your biggest expenses and find ways to reduce or eliminate them. For many of us, that biggest expense is our mortgage.

But not for 45-year-old Jay Shafer of Sebastopol, California. Why? Cause Jay has taken downsizing to a whole other level. Jay lives in an 89-square-foot house he designed and named "Tumbleweed." Jay, a former grocery store clerk, now designs these houses for a living. And not only has his mortgage disappeared, his utilities are now under $100 a year. Here's his story:

To be honest, this lifestyle appeals a great deal to me. Not only because of vastly reduced expenses, but also because of the burden of choosing, maintaining, replacing, cleaning, and storing our "stuff."

That said, I wouldn't go near this lifestyle till we're empty nesters because of the following equation:

And even once the kids leave home, really, let's be honest, what's the likelihood?

It's not how much you earn...

While searching for something else, I stumbled across this ABC News story from October: "Latest Celeb Money Meltdown: Nicolas Cage." The article recounts the financial trials of various celebrities and semi-celebrities who have seen the the financial rewards that accompanied professional success somehow slip away.

Among those on the list:

• photographer Annie Leibovitz ("has struggled to stay out of debt");
• actor Stephen Baldwin (he and his wife "defaulted on over $824,000 in payments to their mortgage");
• baseball great Lenny Dykstra ("foreclosure sale of [his] $18 million California mansion");
• mob-boss daughter Victoria Gotti ("apparently owes $650,000 to JP Morgan Chase Bank");
• actor Willie Aames, former star of 1970s and '80s hit shows Eight is Enough and Charles in Charge ("filed for bankruptcy last year, and his home is in foreclosure");
• actress Jodie Sweetin of Full House fame ("house is in foreclosure...water has been shut off twice").

As for Nicholas Cage, one of Hollywood's highest-paid stars, the ABC report says he "owes the IRS more than $6.6 million in income taxes." A CNN story quotes the actor's former attorney (against whom Cage has filed a lawsuit) as saying Cage needed to earn $30 million a year "just to maintain his lavish lifestyle."

In a court filing, the attorney noted that in 2007 Cage went on a "shopping spree" that included "the purchase of three additional residences at a total cost of more than $33 million; the purchase of 22 automobiles (including nine Rolls Royces); 12 purchases of expensive jewelry; and 47 purchases of artwork and exotic items." Cage also reportedly bought two castles, one in England, one in Germany.

Nicholas Cage may earn millions of dollars a year, but I'm reminded of a line from Dickens:

Annual income twenty pounds, annual expenditure nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pound ought and six, result misery.

The numbers, of course, are relative. Annual income $20 million, annual expenditure $20,600,000 (or more), result misery.

Financial security/stability is far less about how much you earn than it is about how much you spend — and, of course, how you choose to invest any surplus.

House ≠ Happiness

I recently read Stop Acting Rich...and Start Living Like a Real Millionaire, the latest book by Thomas Stanley, author of the 90's best-seller The Millionaire Next Door. There was one specific part that jumped out as something to share here.

First, let me point out an underlying truth, that hopefully most SMI readers will immediately recognize: there's a lot more to true happiness than incomes, spending habits, and such. Without Jesus, the rest isn't worth anything, whether a person thinks they are "happy" or not.

With that said, though, it's important to also point out that Christians are not immune to the correlations between money usage and happiness. So don't be too quick to discount the way you handle money as a strong influence on the degree of happiness you feel. The great news in this regard is it's the way you carry out your stewardship duties (my choice of wording) that is found to be predictive of happiness in study after study, not the absolute level of wealth or income you possess.

Back to Stanley's book. Throughout it he illustrates the contrast in spending habits between two groups: those with high incomes but low net-worth (big earners but big spenders), versus those with high net-worth who may or may not also have high incomes.

In his chapter on housing, Stanley goes into some detail about the degree of happiness these groups (and some subsets within those groups) report. Most happiness studies find that factors such as health, loving families, and enjoyable jobs are the most important ingredients to overall happiness. But in his studies, even when these other factors were present, there was still a noticeable split in happiness among the high-income group.

Stanley explains:

Much of their dissatisfaction is found in certain choices the have made. Two key choices are neighborhood and house. Both of these elements influence consumption patterns. What if you earn $200,000 a year but spend like neighbors who earn $300,000? You are likely living above your means. As my surveys and studies have found, those who live above their means tend to be dissatisfied with their lives. Conversely, those who live below their means are significantly more likely to report that they are happy.

He goes on to develop the point that the price of the home is only the beginning. When you live in a more expensive neighborhood, the cost of everything seems to creep up, if for no other reason than the spending habits of your neighbors tend to pull yours upward. Few are immune to that tug (and those who are probably are less likely to buy into the more expensive neighborhood in the first place!).

Stanley is hitting on a theme here that we've mentioned before in this blog, namely that absolute income is not as good a predictor of happiness as relative income. To illustrate this simply, someone making $100,000 is statistically more likely to report they are happy if they live in a neighborhood where most of the neighbors make $75,000. In fact, it's quite likely that person could make more money, say $150,000, and wind up reporting they are less happy — if they live in a neighborhood where most of the neighbors make $200,000.

In case you're tempted to think you would be happy in any of those scenarios, given the high incomes I'm talking about, guess again. The same pattern holds whether you cut all the numbers in the prior paragraph in half or double them.

Stanley has this advice for those caught in this trap, or possibly inching towards it without even realizing what they're about to do:

How can these Smiths [those with relatively lower incomes than their neighbors] find happiness? Get out of Jonesville [i.e., neighborhoods with houses that are a struggle for them to afford]! This is an especially urgent message now with real estate prices plummeting and some tempted to grab a so-called bargain in or around an exclusive neighborhood. Never forget that that nice house in the prestigious community will cost you considerably more than the price of the mortgage, real estate taxes and insurance.

Your ego may take a bit of a bruising by admitting that you don't have the income to live among the glittering, but bruises fade with time, and it's almost guaranteed that your satisfaction with life will increase once you are no longer fighting to keep up with those who can simply run faster.

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