This morning as I was reading a recent article from the NY Times "For Athletes in Motion, Real Estate Can Be a Burden", it re-emphized in my mind the importance of always advising all clients of the financial implications of investing in real estate. Having been around various aspects of real estate for many years including corporate consturction of plants and labs as well as sale of residential homes I have become acutely aware of our resposibility to advise clients of the full realm of possibilities, including what might happen in worst case scenarios such as at the end of a variable rate mortgage, or buying that dream home that will stretch their budget. It is too easy to get caught up in wanting to close the deal. While real estate can be a good investment, even in this market, it requires us to really help our clients analyze their long term needs.
I learned a hard lesson personally in a ReLo move from Ohio to California. Several years ago I moved from Ohio selling a home in a depressed housing market losing about $30,000 selling that Ohio home with a 16.5% mortgage. (Note my interest rate and we had excellent credit!) Coming out of that sale cash poor we bought a low end condo $150,000 in California as it was all we could afford since mortgage rates had risen to the 18% level by that time. Now that was before the chemical company who employed my husband began to guarantee transferees a break even that most of them give today. To get that low end starter condo, we got an ajustable rate mortgage fixed for 1 year. The first month our mortgage passed that starter rate our payments jumped nearly a thousand dollars with 6 month adjustment periods where they could continue to go up. Luckily we were in a boom California market so that condo went from $150,000 to 250,000 in that 12 months. We sold that property and bought another single family with a 30 yr fixed mortgage. Two more years and my husband was transferred again, but this time in a down market just before Orange County went bankrupt. By that time the company purchased the home and we moved to Texas with a break even. If our company had not matched our purchase price we would have been in position many of today's homeowners find themselves of being unable to sell a home in a transfer.
Here are some questions I try to ask my Relocating Buyers before I show them any homes:
1. How long do you think you will stay here? If the time is less than 2 years they need to be very careful where they buy and what they buy. For some it may be better to lease if their qualification only puts them in older fringe areas that are the most vulnerable in economic downturns.
2. What monthly house payment is comfortable for you? For most people that's less than they qualify for.
3. If the unexpected happens, how long can you survive financially? This makes people think of that reality
4. If you can't sell your home and break even are you willing to use some of your own money to sell & how much of your own money are you willing to lose? Are you able to keep it as a lease property? (The type of mortgage they choose may be influenced by this answer)
I tell my clients, "When you come back to me in 3-5 years and ask me to sell your home, I want to guide you so that we'll have the best possible chance to do that."