By Tony Wong – Business Reporter | Wed Jul 21 2010
Toronto Star business reporter Tony Wong has been writing about real estate for the past 10 years.
Next to public speaking, buying or selling a home is at the top of many people’s fear and loathing list. It’s understandable. A home is the biggest investment you’ll ever make and while exciting, the potential for things to go wrong is pretty big. That adds up to enough stress to keep you awake at night thinking about all the what-ifs. But it doesn’t have to be that way. Here are 10 things to consider when buying a home.
1. The housing market isn’t really a market
At least not in the way you might think. While housing analysts like to compare real estate returns to stock market returns, it is a misleading comparison.
The first big difference is that a stock market is a place where you can by and sell immediately. In the real estate market you can wait months for the home you want to come on the market and just as long to find someone who wants to buy yours. The price you expect may not bear any resemblance to the one you get.
The long run return on stocks is also a lot better. The average stock in the Standard & Poors 500 index, a basket of blue chip U.S. stocks, has returned about 7.5 per cent a year after inflation in each of the last 25 years. The average increase in the value of a Canadian home over the same period petty much tracks the rate of inflation which during the same period was 2.5 per cent.
A home is also more than an investment. It has all kinds of intangible qualities, including a neighbourhood you want to live in, a spot with a particular view or landscape, a type of architecture that you enjoy. So, while it’s tempting to think of your primary home as a profit centre ripe for a flip, that shouldn’t be the main purpose.
Besides, your Microsoft stock can’t keep you warm at night. (Unless you bought it when Bill Gates was still working out of his garage. In which case, you probably have your own heating company.)
2. It’s always a good time to buy
No it isn’t. People who bought at the height of the market in the 1989 real estate bubble, didn’t break even until prices bounced back in 2002. That’s 13 years. And even then they didn’t make their money back. Factoring in inflation, they actually lost money. House prices don’t go up forever. Buy when your circumstances dictate, not because your neighbor the agent says it’s a good time to.
3. Location, Location, Location.
Yah, they’re right. You’ll pay more initially, but investing in a property in the good neighborhood close to transit will pay dividends down the road when it comes time to sell
4. Buy the cheapest house on the street
Some people argue you shouldn’t, because the home will compare poorly to the other homes when you sell.
I say go for it. It may already be discounted because it looks like a shack compared with other properties and provides far more upside if you spruce it up in the future. A rising tide can also help to lift all boats. As the street gentrifies, infill housing will continue to keep property values high. Getting your foot in the right address is half the battle. Hello Park Place!
5. Do I need an agent?
No, you don’t. While a good realtor can be a huge asset, not everyone needs professional advice. If you have time, selling your own home can save you a ton of money on commissions. With the advent of the internet, and the opening up of the Multiple Listing Service there are many more services for the do it yourselfer to choose from.
6. If you want an agent…
If you don’t have the time, or would rather use professional advice, a good realtor can be a boon, because they know the neighborhood and can potentially get you top dollar. But like any other service, the results will vary. So make sure you interview several before choosing.
7. Renovating will give me huge return
Stop watching all those television shows where some fancy designer redos the entire house in a week with faucets that cost more than your BMW. Okay, I like them too, but that doesn’t mean you have to gut your kitchen to sell your home.
Most experts say you’ll get the best bang for your buck by redoing the kitchen and washrooms. But even for the most sought after features by homebuyers, the return on investment is anywhere from 75 per cent to at best 100 per cent. That means in many cases if you spend $10,000 you’ll only add that much vale at best and maybe far less.
8. It just needs a coat of paint
When it comes times to sell, you may have been living in your home for so long that you don’t notice the coffee stains on the couch and the Sponge Bob wallpaper in the washroom. Get a second pair of eyes to have a look around. This could be friend, relative or your agent and hopefully they’ll tell it like it is.
You may want professional help in the form of a home stager who can arrange your furniture and make your place look showroom ready. But you don’t need to pay big bucks. Start by asking a friend. She’ll tell you why Sponge Bob must go.
9. Don’t try to time the market
I know people who sold their home at the peak of the market, and rented a condo while riding out the crash.
After the crash, they repurchased near the same neighborhood for substantially less. This is the dream of every home investor. I also have friends who thought the market was going to crash, so they waited for four years to buy a home. Prices kept going up and they finally threw in the towel and bought at a higher price than they expected. Then the market crashed. Housing is a long term investment, and sometimes you just have to commit.
10. Keep your perspective
My friends think think their 1,500 square foot semi is worth a bundle, because they spent hours building the deck and hand painting the cute gold cherubs on the walls.
Being emotionally attached to your home means that when it comes time to sell, your objectivity is compromised. In a down market, with more competing listings, your home is going to be difficult to sell and the price less than you expect. Can you accept that?