"It's yours!" About ten seconds after hanging up with the selling agent, I couldn't wait to deliver the news. This had been something he'd been waiting years for and today was the day. And after those two words, the only thing on the line was stunned silence! A combination of elation, shock and achievement. You could feel the excitement echoing through the airwaves but the quiet could have put out a candle.
For all the number-crunching, research, and analysis I do to ensure my clients are making good financial and investment decisions, the one thing I never lose sight of for them is the emotions they'll go through during the process of buying and selling their home, and how they'll feel when they're living there.
I'm a Silicon Valley residential real estate specialist, but even in the highly-analytic world of commercial real estate --- where contracts, traffic flow, and demographics rule the decision-making process --- the right location can make you feel like you're absolutely unstoppable. How great would it be to come home every night to something that makes you feel just as good? And what are reasons people are afraid of it?
Having Something to Lose
I sat quietly in the meeting hall listening intently to their stories. They were proud folks who'd obviously been living in their Silicon Valley neighborhood for a very long time, some were lifelong residents. The house in question --- the one being built --- was not one of theirs.
"The portico is like the Taj Mahal," he emoted defensively. The double-decker wasn't a ranch and did have a palatial feel compared to its brethren which had been built in the fashion of their day. A ruling on the matter had to be made and the committee handed down its decision. But beyond the negotiation, speeches, and compromises, you uncover one of the key emotional reasons why people buy homes instead of renting.
Yes, you can efficiently use leverage to increase your investment returns, there are sizable tax deductions for mortgage interest which are very helpful for people in the Bay Area with six-figure incomes, and building equity allows you to keep more of your own money. But, I've discovered through experience that, emotionally, people buy homes because they want to care about where they live.
Reasons People Avoid the Decision to Buy a Home
In spite of that, people --- even ones who know they can afford it --- don't take that next step. I've talked to a lot of good folks like that and here are some of the reasons they gave me.
1/ Losing Money
"When is the crash coming, Steve?" Everyone knows it's possible to lose money in real estate, but I knew her closely enough at that point to say, tongue-in-cheek, "The year after you buy your house!" She looked at me sideways --- like I'd just double-parked my spaceship --- and then I drew a graph on a piece of scratch paper: a graph that looked like the red line in the Cupertino home prices article I wrote.
I didn't have the numbers with me then but I'll use them to illustrate now. "How long are you planning on living in your house?" I asked her. She said about five years which is reasonable in this day and age considering she was single and upwardly mobile.
"Let's say you bought a Cupertino condo in 2002 and paid the median, $557,500. That means you paid a lot more (17%) than you would have during the dip the year before. In 2003, the median price dropped to $435,000, down 22% percent from what you paid. You just lost 22%, right? Well, no. You weren't planning on selling for four more years at which point the price is $650,000."
(I'll explain how I calculate profit in a future article. If I need to whip out a number quickly, I'll use the difference between the sale price and purchase price, divided by purchase price, but that's not what I prefer to give my clients.)
2/ Financial Stress
"Now I've got no money," he said. It was a joke but I understood where he was coming from. There's a comforting feeling knowing that you have that money somewhere, whether it's liquid in a checking, stored in a high-interest yielding CD or online account, or rolled up into stocks and mutual funds. The idea of buying something and not being reminded of that large cushion of money every month when the bank statements come is a scary feeling.
I understood what my client was going through because I've been there, and from his vantage point at the time, it looked like he'd just put myself into a financial hole of several hundred thousand dollars. Feeling the responsibility of debt is perfectly reasonable. That's what sets people with good credit apart from the rest of the pack and it's why he got such a good deal on his mortgage.
But there's a mental leap that was very important for him make. The money was there for him --- it goes into that mystical concept of equity, which is just the difference between what you owe on a house and what you can sell it for. But no one is there to remind him every month that, while he's responsible for the mortgage, he's not in debt the same way as if he'd maxxed out all his credit cards in Las Vegas. Like investing in stocks or gold, you have paper gains.
The difference is because you're using someone else's money, you also have added responsibility. And that responsibility can be the root of the fear.
He (and everyone else for that matter) isn't in control of the market. I believe it's essential to work with my clients to make sure that they're prepared for whatever the market will do before, during and after buying their house.
As part of this work, I explain how you actually have a lot of control, control which can reduce your financial stress: you can determine your payments, how much debt you take on, how quickly you pay that debt, what you do with the asset, and how you prepare for buying it.
Thirty days notice. She thought about whether there was a fresh start to be had in some other city. Or that new job in the Peninsula which was just waiting for her. Those neighbors upstairs, if they kept on making that ruckus. Thirty days. That's all it takes before you can pick up and leave an apartment. Heck, she could pick up and leave sooner than that and she'd only be responsible for the couple months she had left on her lease. What could be simpler? And why would she tie herself down with a house?
No, it's not easy to buy or sell a house. Ask anyone who's tried to do it themselves. The number floating around the industry is that one in ten for-sale-by-owner (FSBO) sales actually succeeds.
If you're at the stage in life where buying a home feels like it would tie you down more than it would bring you delirious happiness, then it's probably not the right time for you to buy a home to live in. (There are times when an ethical real estate agent needs to be upfront about putting off buying a house.)
But I love people's creativity. I met a young couple who was planning on getting married in a few years and they bought a house together. But they weren't going to live in it, they were going to rent it out until they decided that the time was right for them. Given their jobs and how --- even as an outsider --- you could see how committed they were to each other, along with the reasonably strong rents in that area (not enough to turn a profit every month after management expenses, but good for Silicon Valley), it was a clever idea.
4/ Additional Work
He'd spend hours on it. If it wasn't the perfect shade of green, he'd mix up the right fertilizer and walk every inch of the lawn making sure the coverage was even. This was his idea of paradise. My client furled his brow at the thought and imagined himself spending the precious hours of free time he had lingering in the garden digging up weeds and mixing the mulch. No, he didn't want to throw money at the problem either --- it just didn't give him the same pleasure as it did the gentleman who doted on his lawn.
Fortunately, there are Silicon Valley homes for both types of people. The floors were well insulated from sound so the upstairs neighbor was no bother at all. It was a luxurious place by any standard with a lush and durable carpet and upgraded details, down to the etching in the crown moulding. There wasn't a yard to speak of but the balcony area was large enough for entertaining and the pool. The pool. It was as if the water were made of pure blue topaz.
The recent renovation brought not only a fresh coat of paint but a complete rejuvenation of this once again proud complex. And, even after the expense, the HOA was still 90% funded and the monthly fees were reasonable for the area. Fifty less worries for a reasonable monthly fee. And this was perfect. What I want for my clients is to find the places where the fee is reasonable. After all, I wouldn't want my clients to pay money every month and not be able to see tangibly where it goes.