As a New York attorney, I am amazed that in buying a home, typically the largest investment most people ever make, that they consult with non-professionals before ever consulting with their professional advisers. Now, I am sure that this article will upset many professional Realtors, but the truth is that a Realtor is not required to take any specialized coursework, and that most Realtors simply lack the education and expertise necessary to properly advise their clients.
Specifically, a person who desires to purchase their home typically walks into a Realtor’s office, or in 2010, simply text messages or e-mails the Realtor, and informs the Realtor of their desires. The Realtor may inquire minimally as to the price range that the buyer can afford, the buyer’s income and expenses, but their inquiry is not to serve the buyer, but rather themselves. The Realtor is inquiring to make sure that the Realtor does not waste his or her time showing the buyer homes they cannot afford.
I believe that the entire industry should be turned upside down. In a perfect world, before buyers ever purchase a home, they should first go to a certified financial planner, their CPA, and their attorney. The certified financial planner should review the contemplated purchase transaction as it relates to the home buyer’s overall financial condition, with the CPA analyzing the planned purchase and its tax implications for the purchaser, and the attorney should review the steps in the home buying process and provide the purchaser with a checklist of due diligence items to be performed.
I realize that the prior paragraph may make some laugh, but if someone was making any other financial investment, they would be called a fool if they simply handed over their cash without doing any due diligence. Yet everyday, buyers and sellers of residential homes make purchase offers and accept these offers without ever conducting any serious due diligence.
Sellers routinely sell their homes without ever speaking with their accountant until the following year when the taxes are due. These Sellers often could legally avoid some, if not all tax liability, by means of a 1031 exchange on investment property, or by understanding their cost basis and related exemptions on sales of primary residences, as well as the time periods required to realize such exemptions.
In analyzing myself personally, I realized that as an attorney, I possess knowledge that most Realtors simply lack. As someone who has also taken courses in mortgage, financial and tax planning, I understand the financial implications of selling a home for a huge profit without first contemplating your tax liability, as well as financial strategies that enable a home buyer to lower his or her monthly payments without making a larger down payment. After watching both seller and buyer get taken advantage of, my crusade is to provide educational information to the public.
Banks make money, lots of money, by lending. They spend billions of dollars each year on advertising. Banks love promoting the fact a fixed rate mortgage provides “security”, because banks realize that the average person stays in their home between five to seven years. Fixed rate mortgages, which typically carry higher rates of interest than adjustable rate mortgages, are viewed as the “safe” and “prudent” choice, sometimes even by accountants and financial planners that should know better. The reason is that emotion takes over common sense.
While you may live in your HOME, I suggest thinking of it as a “HOUSE” whenever money is involved. Sure you may love it, it may reflect your personality, etc., but if you treat it like any other investment, you must detach your emotion from your HOME and treat it as a HOUSE.
Most advisers do not want to offend their clients, and when they see that someone is emotionally attached to an investment, are hesitant to say “get rid of that stock, it is garbage”. Instead, not wanting to offend, they gently suggest or sometimes alter their beliefs and verbally support the client’s emotional involvement.
The above discussion of mortgage products was not really about which product was best, but rather to illustrate the importance of removing emotion from any financial decision involving your home. Thus, I am not advocating that anyone should only get an adjustable rate mortgage. In fact, with rates as low as they are right now, everyone should consider only fixed rate, unless they know for a fact that they will only remain in their home less than five years.
If you are certain you will stay in your home for less than five years, you should explore the possible interest savings of an adjustable rate mortgage and whether or not it makes financial common sense to select such a product if you know you will not be staying in your home. For example, if you could save $300 per month in interest expense by selecting a seven year adjustable rate mortgage product, which would remain fixed for seven years, and you planned on leaving after five years, that would be over $18,000 in real savings that someone could realize simply by using financial planning strategies and due diligence in addressing their home.
The purpose of this article was to teach people how to sell their home themselves, but in order for me to begin with “Step One”, I believe it was important for each reader to understand some of the financial, legal, and tax implications associated with the sale of a home.
Because someone selling their home is going to be living in a new residence, the above discussion of mortgage products was specifically included, not only to demonstrate the importance of removing emotion from the decision making process, but also to hopefully point out how taking advantage of mortgage planning and financial planning strategies can help you save many thousands of dollars over just a few short years. I have not even addressed how to invest the thousands saved, which I will leave for Certified Financial Planners (at least the few good ones that charge flat fees). Read More