10 THINGS NOT TO DO – In A Falling Market!
1. DON’T BUY HIGH! Don’t pay as much or more for a property as similar property sold for at the top of the market.
2. DON’T ASSUME EVERY PROPERTY IS OVERPRICED. When properties are well priced they still get snapped up almost immediately and bidding wars sometimes still erupt.
3. DON’T HOLD A PROPERTY IN A FALLING MARKET! Did your Realtor tell you to drop the price and sell? Did you say, “I don’t have to sell. I can hold on until the values go up again.”? In a falling market, the longer you hold property the more money you lose. Think of it this way. If you bought at $500K and can sell at $400K you lost $100K. Maybe you can buy the same type of property back for $300K when the market finally hits bottom. In a falling market you only want to hold long term property that cash flows or property you enjoy using.
3. DON’T SELL LOW! When the market hits bottom and rides there for a while people begin to measure inflation against their negative cash flow. This usually happens just after they pay their property tax and about the time they do their income taxes. After a few years some people finally sell at the bottom of the market – just when the seasoned investor is buying. Plan ahead for the long term. If you aren’t using the property or can’t turn the negative cash flow around you may have to sell. Do a 5 year projection to help make the decision.
4. DON’T EXPECT TO MAKE BIG MONEY ON IMPROVEMENTS! Remodeling in a falling market should be done to increase your personal enjoyment in a property you are using. It might also make an unserviceable or unsaleable property viable. For example it is hard to sell a 3/1 home. Adding a second bath will probably return more than the cost of the improvement. Nationally, bathroom remodels recouped only 69% of the cost. That means there was a loss of 31% of what was spent on the remodel. If you need to sell a home that won’t move because every other home in the neighborhood has granite, your improvement might not increase the value of the property but it might move the property.
5. DON’T MAKE IMPROVEMENTS THAT WON’T LAST. A new patio adds lasting value to a home. New carpet is more maintenance than improvement. New appliances will be old in 5 years. Hardwood or travertine floors will be just as valuable when the market improves as when they are installed.
6. DON’T OVER IMPROVE! A million dollar home located in a nice neighborhood of $500K to $700K homes probably won’t sell because most people who are willing to pay $1M for a home want a similarly priced neighborhood.
7. DON’T EXPECT A SHORT TERM GAIN – FLIPPING IS OUT! Buying a virtually unsaleable home below market for homes in the area, renovating and turning it over for a profit is VERY RISKY in a falling market. If you pay $450K for a property, spend $20K on improvements over 60 days, hoping to resell it for $550K, since the average number of days on market is now 180, with values sliding down at about 1% per month, your value could drop to $506K before it is closed. The $36K you made will be partly used to pay closing costs. Realtor fees could cost about $30K alone. If you are operating with cash you may make a very small short term profit (taxable as ordinary income). If you are carrying a mortgage on as much as $350K you will have spent about $18K in payments and the process will have become an expensive hobby.
9. DON’T BUY PROPERTY WITH HEAVY NEGATIVES. If you are not using a property, look for property that will cash flow. Take the property above you bought for $450K with 20% down, spent $20K cash on long lasting improvements your Principal and interest payments are $2044/month and it can be rented it for $2500/month. Congratulations you have a property that will cash flow. You can hold it until the next seller’s market comes along. You actually have $110K invested and your tenants are paying the property tax, insurance and interest. They are also paying against the principle so if you held it for 30 years and it was still worth no more than the day you bought it, you would have made $350K. This is a gross simplification. There are other issues to take into consideration but this is a conservative approach to purchasing real estate.
10. DON’T WAIT FOR PRICES TO FALL WHILE INTEREST RATES CLIMB. Unless you are a cash buyer, this may be the best time to buy. Right now interest rates are beginning to climb again. You lose more buying power when rates go from 5.5% to 6.5% than when they go from 6.5% to 7.5%. Do the math. If the you lose $150K in buying power over the next year and the value of your dream home only drops $100K, you didn’t make a good choice.
If you want help evaluating specific properties, call me.
Joyce Murphy, Realtor Broker BIC
Accredited Luxury Home Specialist
Hawaiian Isle Real Estate LLC and Luxury Real Estate Florida, Inc.
“In Real Estate, Experience Counts!”
808-443-4302 / 808-327-1155
More Kona Real Estate Information at:
www.LuxuryRealEstateHI.com
On this page not only will you see properties represented by Joyce Murphy, but also properties represented by other members of Hawaii Information Service. This information has been supplied by third parties and has not been independently verified by Hawaii Information Service and is, therefore, not guaranteed.
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