Based on what John and Lee (privacy protected) learned about real estate from friends and online searches, these first-time buyers believed that location is less important than price.
Do they know what they're talking about?
John and Lee currently rent a spacious apartment in the city where they both work. They thoroughly enjoy their urban, walkable neighborhood and its proximity to work and to all that matters to them.
Ready to move onto the next phase of their lives, the couple recently decided it's time to invest in real estate. They are attracted to a less-pricy real estate market in the smaller, more-rural center across the state line because they feel they'll get more house for their money there.
List price can dominate decision making for buyers, but is it always a clear indicator of where value lies? List price is the price—based on each seller's own criteria—that sellers indicate they may consider selling for as part of their public offering.
The couple's decision to move to a cheaper real estate market is based on key assumptions they've made, not on a drive to dramatically change their lifestyle. If you're a wanna-be buyer or have recently purchased, do any of the couple's Five Real Estate Assumptions, below, sound familiar to you?
# 1. Square footage is their immediate focus since the couple plans to start a family once they are homeowners and assume they'll need more space.
# 2. Commute time or expense is not a big concern to them, even though living in a community across the state line will force them to battle often-unpredictable bridge traffic—Lee each week day and John several days a week.
# 3. Older, more established neighborhoods appeal to this couple, even though neither of these long-time renters have any hands-on experience with living in or maintaining an older property, or paying others to do so.
# 4. Interest rates have been low for so long, these eager buyers—John a self-employed entrepreneur and Lee a teacher—assume that they'll get the mortgage they need once they find the right property.
# 5. The couple is confident they can "figure out real estate" by asking friends and checking things out online. They assume that they'll always act in their own best interest.
Based on your own experience, do you have any concerns about their assumptions and related decisions and perspectives? Could anything go wrong for them? What should their first step be?
John and Lee made assumptions that are common buyer limitations. Watch enough real estate TV shows, follow enough buyers on social media, and check out enough online listings and you can feel like a real estate expert. If it were that easy, no one would ever buy the wrong house or choose a poor location. Nor would anyone arrange a poorly-suited mortgage or fail to arrange necessary financing.
The big question for buyers to consider before they begin the buying process is, "What can't we afford to learn in hindsight?" (Hindsight, or looking backward to second guess yourself, is 20:20; however, the knowledge gained always arrives too late to act on.)
Buying a house, condominium unit, recreational property, or even vacant land is complicated by the fact that each real estate property is unique, so comparison shopping is tricky at best, especially for uninitiated buyers.
Everything may go smoothly for John and Lee during the buying process or it may seem to. However, if they are wrong about any one or more of their 5 assumptions above, they may not discover the full impact of these failings until long after they move in or when they want to sell and use the expected profit to up-grade to their next home.
Real estate professionals will tell you that each of these common buyer assumptions raise many questions and concerns that should be resolved before buyers sign on the dotted line.
Here's Five Key Real Estate Realities tied to the Five Buyer Assumptions:
# 1. Square footage: Buyers may gain more square footage in lower-priced real estate markets, but those properties will usually not increase in value as quickly as more prized locations, if they do at all. For instance, market value is also strongly tied to local schools and amenities, so proximity to top-notch schools will drive real estate appreciation, even for owners who do not have school-aged children.
Assumptions that big houses are better are distracting. Space-efficient design and layout can make smaller homes more cost-effective and more pleasant to live in.
# 2. Commuting: Commuting is expensive in terms of time, money, stress, and lost time with family, friends, and favorite past-times. Location, in the form of proximity to work and play, adds value to real estate properties through walkability, reduced transportation costs, and improved life balance. Buying into a different lifestyle and stretching your life between two location can add costs, inconveniences, and missed opportunities that may out-weigh the apparent savings in price.
# 3. Condition: Modernized properties carry more value because they are more comfortable and economical to live in and maintain, and they can look more appealing.
# 4. Mortgages: Rural properties can be harder to finance than similar urban homes. Self-employed individuals may discover that qualifying for a mortgage is more difficult than it is for those with standard employment histories.
# 5. Real Estate Knowledge: Learning the hard way can be expensive in real estate. What we don't know that we don't know or fully understand can result in missed opportunity, over-paying, or being taken advantage of—if not being subject to out-right fraud. Real estate professionals can explain—relative to the buyer's situation—how and why location is the key determinant of real estate value and appreciation over time.
Buyers can benefit from starting their home search by discussing, with real estate professionals who work in their preferred location, buyers' often-unconscious real estate assumptions and conclusions about their online research. These professionals can help buyers weigh alternatives and effectively expand their search area, as necessary, after the professional fully understands buyer needs. Professionals can also explain how market value, not list price, is the key factor when buying.
With professional ingenuity and support, buyers can transform assumptions into knowledge and the potential for hindsight disappointments into forward-thinking strategies aimed at investment in financial and real estate security.