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's 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.
