When is the Right Time to Buy or Sell
This question comes up very often but is a very personal dilemma that cannot be answered by anybody else. There are a few factors to consider prior to signing a purchase contract, but it is one that should be answered by you and your accountant. As a financial guru once advised, “Do not buy unless you can put 20 percent down and have at least six months of mortgage payments in savings.”
My interpretation of this advice is: Do not buy unless you know you can afford it should your worst case scenario happen (separation, unemployment, etc.), and do not buy unless you can plan on living in that home for more than five years.
Where is the bottom?
Many people spend much of their time trying to figure out the “top” of the market or the “bottom” so as to not lose money in either direction. However, there are many factors to consider when sitting onthe sidelines trying to figure out the perfect time to buy or sell.
Selling now might not net you the biggest gain on your current investment (really, you should have sold back in 2006!) but if you decide that you need a bigger home or want to move into a better area, now isn’t such a bad time. Many people worry about the reduction in their current home value, but if you are “buying up,” it’s important to remember that the more expensive homes are also more affordable now than they were before.
Consider this:
Let’s say there was, on average, a 20 percent reduction in home values across Redwood City. You really wish you had sold your home at the peak for $700,000 instead of now, which is at or near the bottom. If you had sold at the peak, you would have bought a $1,000,000 home that you had your eye on and would have been happy in your new home but still worried about the loss of equity in that home too.
All things equal, with the drop in home values, your house is now worth about $560,000 (a 20 percent decrease), and that other home you were looking to buy is now worth $800,000 (also a 20 percent decrease). If you had sold and bought earlier, you would have spent an additional $300,000 for that home, whereas now you will only have to spend an additional $240,000. Not only would you have spent $60,000 more then, but your taxes would have also been based on $1,000,000 instead of the new value of $800,000 which works out to more than $2,000 per year.
This is, of course, a simplified version of reality and things are slightly more complex than demonstrated above, but it should hopefully help you stop worrying so much about your timing. This example assumes that you have put at least 20 percent down on your purchase and have lived in your home for seven or more years.
Zero Equity – or Worse
Not everybody has been in their home for about seven or more years, and some people did buy at the “peak” of the market and have lost all of their equity – or worse, are “under water.” If that is the case, it is best to weigh your options, consult with your accountant and attorney, and make a plan. There is a chance you can get a modification, get a short sale accepted by your lender (if you have a hardship), or decide you love your home enough to stay put and try to recoup some of your equity, but that is another personal decision you must make with the help of your professional consultants.
Ready for Action
I love first time home buyers who have been reluctantly “sitting on the sidelines” for years. They have been stashing away cash each month while cursing the rapidly increasing home prices which kept them from getting in on the action. Now, when they see what they can afford with that booty from the past ten years, their eyes light up and a smile stretches across their faces. We’re not talking mansions in Emerald Hills, but we are talking respectable single family homes in decent neighborhoods!
Now is a terrific time for those first time buyers, especially since Redwood City is one of the most (and last) affordable cities in the Peninsula (west of the 101). Very often since the drop in home prices, mortgage payments work out to be similar or only slightly more than renting, once you factor in your home ownership tax deductions (again, consult with your tax professional). Additionally, although a mortgage payment may work out to be higher than your rent, some people consider the extra amount an investment for the future, since it goes toward your equity, rather than your landlord’s equity. There are many buyers who have been waiting for their chance to get into the real estate market and are quickly realizing that the time is now.
As we are all aware, no two circumstances are the same, which is why it is impossible to say that now is (or isn’t) a good time to buy. Since each individual must be comfortable with his/her situation, it is recommended to speak with a professional (realtor, accountant, attorney) before making the final decision. Very often what you will find is that your situation is better, or worse, than you thought, and with this discussion the right decision will seem completely obvious.
