How To Use Current Real Estate Market Conditions To Improve Your Quality Of Life
I was once taught that the first rule of economics is "never consider sunk costs." In simple-speak, this means that the money you have already spent on something is "in the past" and cannot be "un-spent", thus you should unemotionally look at your present situation and make the best decision possible looking forward.
If you are in a bad situation, do not stay where you are unless it is the very best forward-looking decision you can make.
But we understand that human nature is often loss-adverse, and thus we see people make irrational economic decisions all the time. The decision to "do nothing" or "not decide now" is often based upon the recognition that money has been lost and moving forward now is an admission or realization of that loss.
The purpose of today's blog post is to explore three situations in which a homeowner might implement an unemotional solution to improve his quality of life by using current real estate market conditions to his advantage. This is focused on people who want to move but have delayed doing so (many people are very happy where they are, so we're not counting them :)).
For the purpose of simplicity, let's assume that there are three categories of homeowners right now, all of whom have family and life goals that create a desire to live somewhere else. These categories include:
- Homeowners who own their home "free and clear," meaning they owe nothing on the home.
- Homeowners who have a mortgage on the property, but also have some equity.
- Homeowners who owe more on their home than it is worth.
All three situations have homeowners who have "lost money" or feel as if they have lost money, because their homes were worth 30+% more just five years ago. Even people who purchased their home 20 years ago for far less than it would sell today often feel like they have lost money, because they could have sold it for more money at any time in the past 8 years. This is the emotional baggage that is stopping many people from moving right now.
Free And Clear Homeowners
Of the three classes of homeowners, the ones that own their homes with no encumbrances have what appears to be the easiest decision to make when it comes to making a move today. Just put an attractive price on the home, hire the best real estate company in the area to sell the home, and then take the proceeds to purchase a home where they want to live. Sounds simple, right?
Actually, I have found that people in this situation are the most emotional, as they have to acknowledge more "loss" than the others. They have paid for or paid off the entire value of the home, thus selling it for any less than what it might have been worth in the past is an emotional kick in the pants that not many can stomach right now. But here's the thing.
When they sell their home (and convert it to cash), they then become buyers who will be able to get the home that they want, at prices not seen for the past ten years or longer. It's like being able to go back in time and move to the home of their (current) dreams. If they forget about (how much money they have in their current home), they can make the best decision for moving forward.
This category of homeowner should forget about "sunk costs" and think about the end state. Sell the home and move where you want to be now! When the market recovers, your new home will recapture all that you lost in the old home.
Bottom line: You don't need to stay where you are in order to avoid losing money. The money has already been lost. Will your home "own you," allowing you to avoid admitting that the additional equity is gone?
People With Debt And Equity In Their Homes
These people are very similar to those who own their homes free and clear. They have put a lot of money in their homes, and if they sell it, won't they lose a lot of that money?
Again, we are dealing with emotion and the concept of protecting sunk costs. Here is the non emotional way to view their present situation:
- Money was invested in the current home
- The current home has been falling in value for the past 5+ years
- The current home will continue falling in value for the next 2+ years
- The current home is not as desirable as another home
Bottom line: Take the current equity and invest it in the home where you want to live. Because you are borrowing money (whether you stay or go), today's cost of funds are most likely lower than the rate to which you agreed when you purchased or financed your current home. Move to where you want to live, and then weather the storm of the housing market from there.
People Who Owe More On Their Home Than It Is Worth
This group of people would appear to be the ones with the trickiest situation, but the fact is that many upside-down homeowners are using new short sale strategies to immediately improve their quality of life.
I would encourage people in this situation to think of their situation in a more simple way, in order to clarify the decision making task. Regardless of the number of mortgages on the home, I encourage these people to think of the debt on their homes as if it is two mortgages:
- One loan that will be paid-off at closing
- One loan that will not be paid-off at closing
Once envisioned in this way, we can break their problem down into two categories. Currently, they have
- A real estate problem (they want to move)
- A loan problem (they have a loan with no home)
I can solve their real estate problem. We can implement a smart short sale solution and get their home sold, and then all we have to do is see what we can negotiate with the bank for their second problem.
Worst case scenario, they are likely to sell their home (meaning they no longer own a home they don't want, which is currently falling in value) and they end up having to take an un-secured note with them to their second home. Sounds pretty bad from an emotional point of view.
But economically, it is very smart. They get rid of their depreciating asset that they do not want, and move their "bad debt" to a home that they do want. So we do not solve the problem of "owing money" in this worst-case scenario, but we do solve their housing problem while stopping the loss of equity. Immediately, their quality of life improves and their financial situation, at worst, stays the same.
By taking the emotion out of the equation, all three of these homeowner types who want to move can improve their quality of life, immediately. Don't let a home determine your quality of life. If you want to move, talk to the real estate expert in your area and solve your problem today.