In real estate, a moderate appetite for risk will serve you well

Mood of the Market

You’ve possibly noticed that there’s an election afoot. And if you are one of the billion folks with a Facebook account, you might have noticed something else: the sometimes surprising political leanings, ideologies and even rantings of the people you thought you knew so well.

As much as most of us hate to be predictable, the fact is many of us do hold beliefs and values that fall more or less neatly into a political bucket, whether conservative, liberal or moderate.

As I see it, the recession had a similar effect with real estate. It revealed the real estate styles of each one of us much more than we even knew.

Though generalizations can be pitfall-prone, I’ve found that being conscious of your inherent philosophy on real estate can help you (a) take steps to do the research and create a decision-making process that dials back the undesirable effects of any extreme tendencies you know you have, and (b) account for the differences between your style and your mate’s in advance of big blow-ups and clashes that come up at the most inopportune times, if you let them.

Here are some insights to help you figure out what type of real estate consumer you are:

Conservative homebuyer: Some of the most conservative real estate consumers I know are those who simply threw in the towel during the recession, avowing that they would simply rather remain renters-for-life than endure the ups and downs of the market. But that’s certainly the far right — for the most part, conservative real estate consumers are simply characterized by their aversion to financial risk and their relatively modest hopes and desires in terms of what they look for in a home.

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These are the people who:

  • Buy smaller, less expensive, less flashy homes than they can afford, according to conventional measures of affordability.
  • Buy homes much less expensive than their lender says they are qualified for.
  • Buy later than they really could, saving up longer before buying than they must.
  • Put much larger down payment(s) into their homes upfront than they are required to in order to keep a very tight lid on their mortgage payments as a percentage of their monthly income.
  • Take only 15- or 30-year, fixed-rate mortgages, in any market.
  • Pay their mortgages off early — sometimes years early — by making extra payments all along the way.
  • Never borrow cash against their home’s equity for anything.
  • Would just as soon poke their own eye out as pay more than the asking price or engage in a bidding war for a home — these are the folks who are willing to buy the home with an electric pole in the front yard or the home with condition "challenges" in order to benefit from the discount.

Course-corrections/things to watch out for: These folks generally don’t end up in bad positions, financially, on their homes, but they can end up costing themselves money in terms of missed opportunities from waiting so long for the bottom of the market that they end up buying only after prices start going up. They and their families also miss out, often, on the opportunity to enjoy their homes as much as they can and should, by placing the discount potential ahead of the actual characteristics of a given home.

Conservatives are susceptible to becoming obsessed with the market and fixating on interest rates, kicking themselves and further making themselves miserable if they don’t buy at the absolute bottom (which is nearly impossible) or lock their rates on the lowest day they can remember — even if the rate they do lock costs them only $2.35 more per month than the day they woulda, coulda or shoulda locked on.

These people should get clear on what they and their families truly want in terms of the lifestyle they want to be able to live in a home, and really revisit this list thoroughly before compromising based on price. They should also ask their agent for help staying focused on the comps: Sometimes an over-asking-offer price is still a good price compared to a home’s fair market value, if the sellers priced it low to start.

Liberal homebuyer: At the extreme end of the liberal real estate spectrum are those who saw the recession as an opportunity to double-down on their belief in the long-term viability of American real estate as an investment. These folks scraped up every spare cent they could lay hands on — credit card advances included! — to buy up foreclosures and hold them for the long term.

Less extreme liberal real estate consumers are the category that was most impacted in the real estate recession, because of their tendency to overextend themselves, buy the biggest and best house someone — anyone! — will give them the money for, and to jump on the bandwagon of the day, whatever that is (buy, sell, walk away, refi, etc.).

Liberal homebuyers tend to be characterized by the following sorts of actions:

  • Buying at the very, very top of their price range.
  • Buying the very biggest/best home they can afford — even if they can’t really, truly afford it.
  • Borrowing money from others to come up with their down payment money.
  • Putting the very smallest possible down payment into their home purchase.
  • Taking adjustable-rate mortgages (ARMs) because that’s the only way to get the payment down to a point they can afford.
  • Buying when pundits say buy, selling when they say sell.
  • Pulling as much cash out of their homes via equity lines and loans as humanly possible, then spending the cash on things like vacations and cars.
  • Overinvesting in real estate — and failing to save money to have a cash cushion or retirement funds or anything else, for that matter.

Course-corrections/things to watch out for: These folks are served well to get a financial planner involved in their money matters well in advance of trying to buy a home. They can use professional help in understanding the long-term financial impacts of their decisions, and in setting up personal discipline and good habits around saving, investing, spending and how they use credit before they even take the step of buying a home.

In some ways, these sorts of folks are served well by the relatively conservative post-recession lending climate we’re in — the fact that lenders require hefty cash reserves and are no longer making interest-only, short-term ARMs is actually a good thing for these folks.

Moderate homebuyer: Moderation in all things is an aspirational standard, and that applies to real estate just as it does to most other endeavors. With respect to real estate, moderates don’t have a super-predictable set of behaviors. Rather, real estate moderation is focused more on how they make their real estate decisions than on what real estate moves they make.

Moderates tend to do their own budgets, run the math, get a good basic sense for what they are looking for, talk to the relevant professionals (a list that, at various times, may include a real estate broker/agent, mortgage pro, accountant or other tax professional, financial planner and real estate or estate planning attorney(s)) — and then get out there and buy a home, no muss, no fuss.

No drama. No trauma. No paralysis of analysis. No frenzied rush into — or out of — the market based on the trend of the day. Of course, they take their home and their finances seriously, so moderates don’t make offers lightly or throw money at homes. But moderates tend to buy homes that they feel they can afford and enjoy without going into the poorhouse, but also without trying to get their mortgage payment lower than their electric bill.

Moderates do sometimes invest in real estate, but they also have other, non-real-estate-related assets in their savings and retirement portfolios.

Course-corrections/things to watch out for: Moderates tend to make their decisions about whether and when to buy based on their lifestyles, their families, their plans for the future and their personal finances — not based on what their mom wants them to do or what some television pundit or home price chart suggests they should do. And that’s a good guideline for the rest of us to course-correct to.

Tara-Nicholle Nelson is author of "The Savvy Woman’s Homebuying Handbook" and "Trillion Dollar Women: Use Your Power to Make Buying and Remodeling Decisions." Tara is also the Consumer Ambassador and Educator for real estate listings search site Trulia.com. Ask her a real estate question online or visit her website, www.rethinkrealestate.com.

                                                   

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