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Saturday, October 6, 2007

Keeping a level head in real estate transactions

I read an article in Business Week this week about a new book out, titled "The Little Book That Makes You Rich" by Louis Navellier. Navellier is a Wall Street “quant”, one of the Wall Street advisers and money managers who believes in and practices the science/art of quantitative analysis of the stock market. There were some important tips in the article and I’m sure the book has many more, but the gist of the article and the book is that emotion needs to be kept out of investing in stocks – you need to look at the numbers and learn how to read the trends that are in them. One little phrase seemed particularly insightful – “You can show love to stocks, but stocks can’t love you back.”

As a Realtor, I found much to apply to the home buying and selling processes in Navellier’s advice. You can also love houses, but houses really can’t love you back. We have a saying in real estate that you buy a home, but you sell a house. The difference is the love that you have for the dwelling, which is all in your own mind or memories. When house-hunting some people tend to “fall in love” with specific houses, mainly because some features of the house have kicked off a strong “nesting” reaction that has taken the building out of the realm of being a house and made it somehow your home.

The people who do house staging try to find ways to stimulate that "fall in love" reaction to the house. It may be some piece of furniture – a particularly cute crib in “the baby’s room” – or even the ways that the colors work together with the carpets in a room. I've seen guys fall in love with a particularly well done garage or basement workshop. Home stagers are good at using those emotions; but, should you buy a house because of this emotional reaction to something that is actually fleeting or may even be gone, once you get there (remember that stagers bring in things that are not a part of the house).

I guess I’d be called a quant if I were in the stock market game instead of real estate. On the sell-side of the process, I tend to analyze things using the numbers instead of the emotions that might be evoked by the place. I do a lot of statistical work when getting ready to list a house to try to show the owners where their house will fit into the market. The owners sometimes try very hard to convince me that their home is so much better and therefore worth so much more than other similar homes. They are still emotionally attached to the building as a home, which is understandable. Eventually, especially if it just sits on the market long enough at its inflated price, even the most emotionally attached homeowner will begin to see the house as a product that needs to be sold, so that they can move on with whatever plans they have. Sometimes that takes a few months, sometimes even longer.

It is harder on the buy-side of the process, since an emotional response to a particular house is most often the reason for buying. I view a part of my job as being the cooler-headed professional in the process; so, I’m the one cautioning that we need to look at all of the ugly stuff – plumbing, electrical, foundation, roof, etc. - and not just the cute crib in the nursery. Of course a thorough home inspection is a must and can end up in quite an emotional scene, when someone who is in love with a particular house has to let go of it because of major issues. I’ve had more than buyer break down into tears when they finally concluded that they just couldn’t go any further with a problem house that they loved.

Navellier sites all sorts of bad stock picking and stock ownership behaviors that are caused by the emotions that people let rule them in that process. People tend to sell winners off too early and stick with losers too long, according to his book. One observation that he has in the book is that “…the worst thing that can happen to a novice, unknowledgeable options trader is to make money on his first trade. This leads him to believe he actually knows what he’s doing, and large losses are sure to follow.” In real estate, one of the worst clients to try to deal with when working on the sell-side is the guy who starts out the relationship by telling you, “I sold my last house myself and sold it for full price in 2 weeks.” You just know that this is going to be a tough, maybe rocky, relationship with someone who likely doesn’t have a appreciation for the current market.

Navellier also says that stock market investors often fall victim to what famous investment guru Warren Buffet calls the “rear View mirror” effect looking back at what has happened in the past and expecting the future to be the same. Home sellers who reference a neighbors house selling a couple of years back for more than I’m currently suggesting as a market price for their house are falling victim to that effect. In the market today, looking back more than 2-3 months is worthless, last years appraisal for a refinance is meaningless and what your neighbor down the street got for his house is just one data point in the analysis. If you’ve decided to sell, get a professional Realtor involved and listen to his/her advice. It may also help to start packing up many of your personal items (that will also help de-clutter the place), especially family pictures and mementos that make the house your home. The home that you’ve lived in for years will always remain in your memories; but, the faster you can get to the point where you see it as a house that needs to be sold the better.

So, I walk a fine line between being the cool head who looks at each house as a product that must be thoroughly evaluated on all levels or becoming the Grinch who stole the happiness about finding (or selling) your perfect home. Personally, I'm aways happy for the buyer and/or seller once we have a deal that leaves both sides happy.

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