Many sellers feel like they have lost money, but it is money that they never had. Just like the stock market, the real estate market has good years and bad years.
Real estate isn’t designed to be a short term investment.
You should plan on owning a home for at least 2 years just to cover costs of buying and selling and avoid capital gains tax issues. Think of it this way, homes historically appreciate 5% per year. When you purchase, you typically have fees that add up to around 3% of the sale price. Then, when you sell, your costs will run about 6%. So, the costs for buying and selling equals 2 years of appreciation in a typical market.
Consider this case study. Betty buys a house ten years ago for $100,000. The market goes a bit crazy, and in 2005 she tries to sell, but the home is overpriced. She gets an offer for $210,000, but the deal falls through because the house only appraises for $202,000. Betty ends up refinancing instead of selling. Based on the $202,000 value, she pulls equity out of the house to be used for other lifestyle needs, but didn’t put any of the money toward home improvements.
Three years later Betty decides she really needs to sell and get the mortgage paid off. The market has pulled back on her street, and the house is now worth around $175,000. The seller is stuck. She feels like she just lost $25,000…but it was money that she actually never had. In reality, Betty is still ahead $75,000 in 10 years, which equals an annual appreciation of 7.3%. But, she is stuck in a bad position. They ARM mortgage that she had is adjusting, and she can’t afford the mortgage anymore. But, she owes more money now than the house is worth because she used the home equity to finance her life.
Unfortunately, this story is all too common. It’s one of the reasons that we are hearing so much about foreclosures in the news.
The market isn’t nearly as bad as the news media is making it out to be. Still, you need to think twice before you start using your house to finance your life. If you do decide to take out a home equity loan, make sure that the recent home sales that are comparable to your home clearly show that you should be able to get most of the money back from the home improvements you are planning. And, if you decide to use the money for other expenses such as car loans or college tuition, remember that your home isn’t suddenly worth more just because you decided to use your equity to pay your other expenses. Do you think the buyer should have to pay for your car when they buy the house? I don’t think so.
If you do have to sell and bring money to closing, remember that you are not only paying off your house loan, but also a car loan at the same time.