Trading Places : In Today’s Housing Market, You Can Take a Loss and Still Move Up
Rosanna Locke took a $90,000 loss when selling her Malibu residence--but she’s ecstatic.
That’s because she and her husband bought a more expensive house--with more room, a bigger yard and an ocean view--at a price she figures was twice as depressed.
“We didn’t look at it as a loss. We considered it an equity exchange,” Locke says. And she traded up.
Locke is among a growing number of homeowners resisting the urge to sit out Southern California’s real estate slump, opting instead to take advantage of it by selling their homes and buying properties they believe have greater investment potential.
In other pockets of the country, where real estate prices have either languished or fallen, many savvy homeowners are following suit. In many cases, these homeowners are coming out ahead if they find good properties with better chances of price appreciation.
“There are certain properties where the appreciation, even in good times, is limited,” says Fred Sands, president of Fred Sands Realtors. “So if you can get a better piece of real estate, it makes sense to move.”
No one keeps statistics on how many people are actually doing this. Indeed, some go so far as to deny that homeowners might face a loss when selling. A spokesman for the National Assn. of Realtors, for example, says there are only isolated incidents of people losing money on a home. The typical homeowner--who has lived in the same house for a decade or more--isn’t facing a loss, because houses appreciated rapidly before 1989, he said.
But if you purchased your house within the last five years, experts acknowledge, there’s a good chance you’re in the red, particularly once brokerage fees and commissions are subtracted from the sales price.
The median-priced home in Los Angeles, for example, sold for more than $214,000 in 1989. It’s now going for $199,700. Assuming you had this home and had to pay a 6% brokerage commission when selling, your net price would drop another $11,982. That’s a net loss of roughly $26,000.
And even if your house didn’t depreciate but simply languished over time, you’re also likely to be suffering a loss. Consider someone who paid $150,000 for a house that’s still worth $150,000. This person would lose $9,000 when selling, simply by paying real estate agents.
But the good news is that homeowners tend to suffer together. If you are buying a house in the same geographic area in which you sold, you’re probably going to come out even. In other words, if you’re losing 10% or even 25% on your home, and can find another one that’s similarly depressed, you’re no worse off than when you started.
“People are absolutely reluctant to sell any asset--and particularly the biggest asset in their portfolio--at a loss,” says Gregg Ritchie, partner at the national accounting firm of KPMG Peat Marwick. “But if you assume that your house is down 25% and that everything else is too, you are no worse off than you’d be if you stay where you are.”
Indeed, some believe that if you shop carefully you can actually come out ahead by buying a property that’s likely to appreciate faster than your current residence. Additionally, prices of big houses have fallen farther and faster than small ones, so if you’re tempted to move up, there’s probably no better time.
“Prices at the higher end of the market have taken a bigger dip than prices at the low end,” says Sanford Goodkin of Sanford Goodkin & Associates, a San Diego-based real estate consulting firm. “Consequently, if a person in a $200,000 house can move into a $500,000 house, they’ve got a relatively unique good opportunity. The timing is terrific for that type of purchase.”
It’s worth noting, however, that this theory pivots on the idea that real estate prices will eventually rise again. If history is a guide, they should. Over long periods, real estate prices tend to rise slightly faster than the rate of inflation.
But prices don’t rise steadily. Instead, they jump dramatically for a few years then stagnate--or even drop--for a few, experts note. Optimists believe the market is currently in that stagnant phase and will soon recover. But pessimists counter that real estate prices have gotten way too lofty and may slide further.
Regardless of which side of the argument you agree with, realtors note that certain properties are simply better investments than others.
So it could make sense to take advantage of today’s relatively low prices and trade--even if that means taking a loss on your current residence.
Locke is a prime example. Her previous home in Malibu was in perfect condition but had just two bedrooms and no yard, she says. There’s a very small market for that type of property. On the other hand, her new house has four bedrooms, three baths, a family room, formal dining room and swimming pool.
“If I’d waited for the market to come back, we probably would have paid 30% more for this place,” she says.
Trading Up
Looking for a house that will double as a good investment? Realtors say you should consider the following:
* Neighborhood: Houses on quiet, tree-lined streets sell faster than those on thoroughfares. Before buying, ask your prospective neighbors about traffic and noise.
* Schools: A recent survey by Runzheimer International notes that school districts play a significant role in resale values. Communities served by top-notch districts--those that rank high nationally--are the least likely to experience price erosion over time, the study says.
* Floor plan: Look for one that’s functional and relatively standard. Selling points include large, bright rooms, sufficient closet space and attractive kitchens and bathrooms. Beware of eccentric features that attract but don’t function.
* Yard: Look for a back yard that’s big enough for a swing set and a pool. Ideally, you want something big enough to fit the next buyer’s needs as well as your own.
