I'm a Real Estate Expert: What To Consider Before Buying or Selling a Home Now
Before deciding whether to buy or sell a home, it's crucial to consider the risk of negative equity and its consequences — and plenty of both abound right now on either side.
According to a recent report from Realtor.com, housing prices dropped in 36 of the top 50 metros in August due to higher mortgage rates and shifting local market dynamics. The data revealed that the largest price-per-square-foot declines occurred in Austin, Texas (-8.1%); Tampa, Florida (-5.6%); and Memphis, Tennessee (-4.1%). Experts said that price pullbacks could be positive news for prospective buyers who have been waiting on the sidelines due to affordability concerns.
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MoneyLion spoke with real estate experts about negative equity and how to avoid this increasingly common situation when buying or selling a home. They recommended these five moves.
1. Don’t Rush Into a Real Estate Decision
“One thing buyers often misunderstand about negative equity is that it doesn't necessarily become a problem the moment a home's value falls below the mortgage balance,” said Jim Gruler, a licensed real estate broker and cofounder of Seeking Agents. “The real danger is having negative equity at the same time life forces you to move.”
It doesn’t matter if you’re buying or selling, you don’t want to rush into a decision with real estate because the combination of transaction costs and possible loss of equity could turn this into a poor financial investment. Gruler also said that you may want to avoid treating the maximum mortgage approval as your homebuying budget. You should review comparable sales, current inventory and the property's condition before deciding what you're comfortable paying.
2. Don’t Assume Prices Will Always Increase
"The best way to avoid negative equity is to buy a home not based on the idea that prices will always go up,” said Matt Brown, a real estate agent at Matt Brown Real Estate. “Buyers should consider affordability of the property, true market value of the property, and long-term financial picture when buying rather than just purchasing at their maximum amount approved by the lender.”
When you stretch yourself too thin, you become vulnerable to market fluctuations, which could hurt you if you have to sell at a loss. If you purchase a home over comparable market values because you think the price will increase, you’ll have no equity cushion when home values drop.
3. Avoid Buying If You Know You’ll Have To Move in a Few Years
Gruler said that buyers can reduce the risk of negative equity by being cautious about purchasing with very little down when they expect to move again within a few years. Since real estate transactions are very expensive, you don’t want to purchase a home unless you’re certain you’ll be staying for at least five years because you could end up with negative equity.
It’s also worth stressing that if you sell at a loss, then you’ll have less money to put toward your next home purchase. You don’t want to end up with massive debt when you could’ve avoided the hassle by renting for a few years.
4. Make a Larger Down Payment
A larger down payment provides more immediate equity and reduces the amount the buyer owes, which can help you during market fluctuations. As always, it’s recommended that you don’t rush into buying a property before you’re prepared for the financial commitment.
Brown elaborated, “While negative equity can't be eliminated due to market fluctuations, conservative financing methods, realistic pricing, and sufficient financial reserves can minimize risk significantly.”
5. Determine Your Potential Net Proceeds Before Listing
As a seller, you'll want to determine your approximate net proceeds before listing. Gruler advises that you get the mortgage payoff amount and estimate selling expenses. If the numbers don't work at a realistic market price, you want to know that before accepting an offer. You have to factor in repairs, real estate commissions, possible taxes and other expenses that could arise.
Gruler concluded, “If a homeowner can comfortably afford the payments and doesn't need to sell, a temporary decline in value may have very little practical impact.”
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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