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Friday, March 31, 2017

Living in a Hot Housing Market

Posted by Tim Stobbs on June 25, 2007

Recently I ran into my real estate agent who sold me my house last July. I like the man because he is honest and to the point. He doesn’t pull your chain or embellish the situation into something it isn’t. So with all this in mind, he is one of the few people I feel that can honestly tell me what my house is worth. He told me and I had a hard time standing up.

According to him, and assuming I haven’t done much to the house. I could list and expect the sell my house for at least $320,000 in the current market. Which would mean if I sold and cash out of this market I could, after all the fees, make $100,000 profit on my house or a 250% gain on my initial investment in just under one year.

I was excited about this information for exactly 30 seconds. I justed wanted to enjoy that feeling, but I know that in reality that information means nothing. I don’t want to sell my house and even if I did I would have to buy back into the same market meaning I would not make much if any profit, since the profit on the first house would just go into the second one.

So my suggestion to anyone who lives in a hot market is to ignore it as much as possible unless you are selling and moving to another cheaper market. Yet for those who like to speculate in real estate a hot market does provide an interesting option to flip a house. If your even entertaining this idea, I will warn you. It is not an investment, so don’t think of it that way. You are just gambling with a house.

PS: Sorry for no post last Friday. I was tied up with the family.

Comments

11 Responses to “Living in a Hot Housing Market”
  1. Mr. Cheap says:

    I’ve thought that a fun way to make money with real estate would be to live in a dirt cheap place, then when/if the market turned cold, upgrade to a fancy/nice place. When the market heated up, move back to a cheap place (basically trying to “value invest” in your house). The expense of buying and selling would severely cut into your profit, but I *think* you could do ok.

    The problem would be, if there’s a woman in your life, she’d leave you when you tried to get her to move out of a deluxe property into a crappy place. Plus moving isn’t much fun.

  2. FourPillars says:

    CD – You couldn’t be more correct when you say the gain is meaningless.

    Mr. Cheap – Having bought and sold several houses I can tell you there is no way you could possibly make money with that strategy. For one thing the cycles are very long so if you were to sell at a potential peak (let’s say now), you might be living in the cheap place for 5-10 years.
    Also transaction costs would take care of all profit and more.

    Mike

  3. macdonald says:

    I’m always suspicious when a real estate agent tells me my house is worth so much (without showing me recent transactions). Sometimes they are hoping to get a listing?

  4. Jerry says:

    Well said, profit on paper means nothing, especially on RE, UNLESS you move to somewhere cheaper or downsize.

  5. Mr. Cheap says:

    4P: The long cycles would help you (as appreciation in each property would help pay for the transaction costs). If you assuemd an average appreciation of 3% / year, that woudl easily pay the 5% commision after 5-10 years. Your right that living in the cheap place for that long would suck (*I* could tolerate it, but I think I’d be a lonely Mr. Cheap ;-)

  6. Financial Jungle says:

    I used to be an owner, but now I’m a leaser. There’s nothing wrong with being a leaser for life. In fact, if managed properly, leasers can earn financial freedom quicker than owners.

    Suppose you bought a home for $200k, and an identical home is rented for $1000/month across the street. So you would never sell the home no matter how much it appreciates by? What if you rewire your thinking such that it’s okay to be a leaser? What if the home appreciates to $300k within the next several years? $500k? Not even $800k? You can build an ultra-conservative and diversified portfolio that yields 3% or $2000/month. You can choose to rent the house across the street for $1000, and still have $1000 left to spend. In fact, depending on your tax-bracket, you might receive a tax-refund due to dividend tax credits.

  7. Canadian Dream says:

    Great comments everyone.

    Mr. Cheap – I move too much as is, so I would have to pass on your idea.

    MacDonald – Actually I suspect the number I got was correct as a minimum. My parents listed their house last week for the $240,000 range and have offers around the $260,000 range.

    FJ – If you live in a city with a high house cost to average income multiplier. I agree you would be better off renting. For example, my house’s new market value in my mind is too high to buy at a multiple of about 5, I bought the house back at a multiple of 3 and assumed a mortgage of just 2.3.

    CD

  8. Will says:

    The gains from flipping aren’t necessarily inconsequential. My wife and I started the property game with our first home, a condo that we purchased for $127,900 (5% down). It took about 16 months to build and we made slight gains. About a year in, we decided to build a home. That home cost us $293,000 (15% down). Luckily (yes, I know you can’t always count on the market), we sold our condo for $250,000. We didn’t put any money on the mortgage, but instead paid off ALL our consumer debt. We immediately set to build another home given the market. That home was purchased for $513,000 (15% down to start). I anticipate that, by the time we sell our current home to move in, we’ll have enough to increase our down payment to about 50%. The mortgage, though higher, is tolerable, and we’re committed to paying it down as quickly as possible. My point is that by starting with a $6400 down payment and buy only moving and paying mortgage, we’ve now got about $200,000 equity in our current home and will likely be around $300,000 equity when we move next year. I don’t look at this in money in hand, but as we continue to move, we continue to build equity and (over the short-term ~ 5 years), decrease our mortgage. Big bang for the buck with a dollar saved being two dollars earned! I figure we can get the mortgage below $150,000 in 2-3 years, AND, if we continue paying our current monthly amounts, can pay that out incredibly quickly. Definitely worth it for my wife and I.

  9. Canadian Dream says:

    Will,

    I’m not saying you can’t make some gains, but you have to consider you have gone from a $122,000 mortgage to a $257,000 mortgage. You’re going a bit backwards in my book even with your equity gains.

    I won’t even argue about upgrading to a bigger home can be worth some extra debt, but where do you draw the line?

    CD

  10. Will says:

    For my wife and I, we draw the line with the next home (relatively speaking). More on that in a moment though. Though we’ve increased our mortgage, the move paid out our other consumer debt (as I mentioned). That in itself was a boon because my wife and I needed to move within 3 years anyway to have a family (condo was adult only). This way, we could jump to a new home when the spread was more favourable, rather than waiting 3 years and letting the gap grow.

    As for drawing the line, we still plan to build 1-2 more times after the next home, though will be working hard to keep the purchase price of our new home near to the current value of our existing, which will ensure a decrease in mortgage at the time of the move through the appreciation. Beyond this, we also now have the opportunity to focus on maximizing our RRSP contributions (which I expect to complete by year end 2008) after which time we can put extra money on our mortgage. We actually have net worth for the first time now and will only be increasing as we proceed.

    I admit it’s risky, but we enjoy the process and can manage the risk. I read your post on consumerism and compulsion to buy.. I think my wife and I are reasonable when it comes to the amount we’ll spend on a home. We won’t allow ourselves to get in over our heads.

  11. Canadian Dream says:

    Will,

    Sounds like you have at least considered it all and understand the risks.

    I’m not saying that picking up mortgage debt is bad when you drop some consumer debt, but there are limits. I know when we last moved we cleared off my wife’s student loan and up sized the house a bit, so I picked up around an extra $40,000 in debt total. Yet for what I got for that $40,000 was worth it.

    Best of luck and send me an email with updates on how things work out for you.

    CD

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