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Will You OVERPAY For Your Michigan Home?

I think we need to take a second to address the elephant in the room here. You FINALLY got your offer accepted on a home, you’ve been fighting tooth and nail against other buyers out there, you’ve been selling your plasma to get a larger down payment, Okay maybe not that far, but anyway, you did it, that’s awesome, we are proud of it. Then you see these headlines about the housing market getting flushed down the toilet, your neighbors are selling their homes for significantly less than what you bought yours for. It’s a nightmare worse than anything Freddy Krueger could do, and it’s understandable, but what do you do in that situation? Stick around and find out.



Before you’re even handed the keys at closing or start the home search process, I always chat to my clients about resale value and longevity. These days when buying a home at a premium, whether you’re an investor, first time homebuyer or upsizer, you’re needing to put that investment hat on, not so much to gauge profit margins, but instead as a way to think harder about the decision you’re about to make in an analytical way, while doing it quickly so you don’t lose out on the home you’re interested in, which is incredibly hard and I feel for you.


So what exactly do I mean by resale value?


It’s not just painting your walls or enhancing your curb appeal, although it’s important, those items are given to a certain extent throughout the duration of your homeownership. You need to think on a larger scale, think about the location, the neighborhood, the walkability, the age and condition of the home and if you truly have the funds to turn it into something desirable by the masses (if it’s something that’s not exactly ready of course). Most of those points are pretty self explanatory, but I wanted to circle back to location. You always hear how location is everything, buy the worst home in the best neighborhood, and while all those points are true, i’m someone who circles back to the historic data to get a sense of what a communities economy will look like in the future, of course, I have no crystal ball, but in similar conditions what would it look like? If you google search the area and see articles on how unemployment is rising, shops and restaurants are closing, the HOA’s are being protested, and no one pays their taxes, so all the public services have vanished into thin air, then maybe that’s a spot you don’t want to call home even though the home has everything you want and more. Of course, that was a little dramatic, but you get the point I hope.


Unless you’re someone looking to rent the home out in the next few years and buy another home, think long term. Are kids in the equation? Think about bedrooms, a yard space, schooling, etc. Are you single now, but plan not to be in the next 3-5 years, think about that too. I see a lot of people looking at homes for the now, just to realize that within the next 1-2 years they’d need an upgrade, and that I can assure you, would not be a great financial investment. But don’t get me wrong, resale value is typically a concern for people who don’t know what the next 3,5, or 8 years looks like. Maybe they’ll move in 3 years, or maybe even 1, maybe go a full decade, they don’t know, and that’s why the conversation of resale value reaches the surface, otherwise it would be more about simply thinking longevity, and maintaining your home throughout the duration of your ownership.


Sorry for the tangent, let’s fast forward to you slamming a bag of Cheetos on your fancy couch in the home you finally got the keys to, and the news just so happens to be on saying the housing market is plummeting after you just spent your whole life savings on a house, and the negative news media makes perfect sense because your neighbor just sold their home for $30,000 less than what you bought your home for. First things first, understand that the value of a home is based on comparable home sales or what we would call “buyer behavior”.


In a perfect world that doesn’t even know the word covid, comparable home sales were based on what a home was appraised for, the value given by an appraiser to determine the home’s market value, which would in turn be the loan amount your mortgage lender would give you to buy the home. These days, the appraised value is a hard one to understand since so many people are paying money out of pocket over asking price to secure a home. It’s one of those, “what would you do for a Klondike bar” situations. You have your heart set on a home, it’s the most prettiest gosh darn home you’ve ever seen, you’d spend whatever it takes to get it and maybe sell a kidney. You ended up buying the home for $100,000 over asking price making it a $600,000 home in a $500,000 neighborhood, whereas I might look at the same house and be like ew look at those old orange shag carpets, and move on. It’s a classic story of buyer behavior or what an individual is willing to spend, and since real estate transactions are based on comparable home sales, that guy who was obsessed enough about those shag carpets and spent $100K over asking price, just made similar homes in the neighborhood worth that too. It creates this domino effect that has obviously gone a little far out of control. The same can go in reverse. Maybe your neighbor listed their house for $600,000, and no one was offering on it or maybe they had to move quickly so they could put those funds toward a home they are currently under contract on, so they take an offer of $450,000. Your home would then be valued at $450,000, all because that neighbor had to move out quicker. But don’t get me wrong, we aren’t pricing your home based on one other house, there’s several active, pending and sold properties that are referred to, but anyone whose buying a home has access to that these days, buyers are more savvy with the resources and say hey that home right down the street with the exact same everything sold for $450,000, why would we offer any more? You try, you fail, you move on. And that’s the mentality.


3 CATEGORIES OF PEOPLE IN TODAY'S HOUSING MARKET


I’ve realized there’s three different categories of people in the housing market now that most, if not all people fall under.


#1 - SITTING IN THE BLEACHERS


The first one is the person who is waiting on the sidelines for the housing market to change. They just don’t feel good about where interest rates and home prices are, so they’ve decided to pick a seat in the bleachers and follow the market to jump in at the right time, while hopefully stowing dollars away to better their position. The mentality of a lot of people in this position is that they think prices and rates are just going to drop and the red carpet will be rolled out for them to jump into their next home. I don’t want you to think I lack empathy for everyone in this situation, because honestly it’s scary, I see it each and every day. The homebuying process will always be scary, because it will always involve you having to put a lot of money to the forefront. The best time to buy a home will always be 10 years ago, and that’s a loose saying that has so much truth, not because 10 years ago was necessarily the best time to buy, but because the historical appreciation of real estate has been positive. For the people in those bleacher seats right now, it’s more about your personal situation than it is the state of the housing market. Are you in good financial standing? Can you buy a home without stretching yourself too thin? Can you buy a home based on what the market is now, not what it is projected to be in the future? These are all very important questions to consider, and I know a lot of people in this category haven’t even taken the initial steps of starting a conversation with a realtor or mortgage lender to get an idea of what they can actually afford, and that’s okay, but if homeownership is a goal you want to achieve, see what the possibility is, before you completely trash the idea.


#2 - PURCHASED WITHIN THEIR MEANS


The next category of person out there is someone who purchased a home well within their means. This person bought their home based on “What if?” What if the market crashes, what if I lose my job, what if I have 3 kids, a German Shepard and a spouse? What if the roof goes bad? This person understood that homes are expensive, so instead of completely maxing out their budget, they went the modest route and got something with a much lower mortgage payment, while having the ability to still shovel away dollars for those “what if” situations I mentioned earlier. Of course, if the market drops their home's value would still get hit, but in that case most people wouldn’t try to sell their home or do a refinance of any kind since the home would be appraised and given a lower value. This person doesn’t feel like they are stretching themselves thin financially, they can still go out with friends, hit the slot machines (responsibly), and buy that goofy imported garden gnome for their parents for Christmas since they have the excess funds to. All that to say, if the worst case scenario happens, this person has the funds to back themselves up. That’s why it’s crucial to think long term, because selling or refinancing are really the two instances that are the biggest downfall for people when it comes to market changes.


#3 - STRETCHED TOO THIN


The third person in this case is someone who stretched themselves way too thin by buying something a little too emotionally and not enough strategically. They maxed out their budget, putting every ounce of their paycheck in the mortgage payment and were sold on the idea that rates will come down at some point so you can refinance for a lower mortgage payment. Which is all fine and dandy, if you could actually afford the mortgage payment where the mortgage rates are currently. In this situation it gets a little scary, there’s no magic 8 ball that tells you when your furnace, AC or roof is going to go bad, of course you may know the age of it, but did the last homeowner of 25 years ever take a second to maintain it? By the 300,000 cobwebs swallowing your furnace whole, I'd say probably not. So it’s probably a ticking time bomb. If one thing goes bad in that house, it could be a full blown disaster for you and your finances. If the market drops, this person is not going to sell or refinance, because they wouldn’t walk away with any profits whatsoever, so they continue living paycheck to paycheck hoping one day they get the big raise they were promised 5 years ago, or the mortgage rates hit 2% again like that one guy said on that one video you watched before you bought a home.


So if you’re someone trying to get into homeownership and are struggling to figure out what to do next, it’s important to take a seat and think about or even write down your options and if it makes sense right now. What’s your savings look like? Is your income in a good spot? Are you sticking around for a while? These questions create a guideline to your readiness for homeownership. I always say it doesn’t hurt to start a conversation, because conversations are free and if it educates you enough to get you to either side of the fence, that’s all we can hope for.


Cheers,

Andrew


Andrew McManamon is a Michigan REALTOR® with Signature Sotheby’s International Realty and provides real estate services to Buyers, Sellers and Investors throughout SE Michigan including Livingston County, Oakland County, Washtenaw County, Genesee County & beyond. Andrew has become one of the rising stars of Michigan real estate agents. Prior to his real estate career Andrew was responsible for managing a senior living facility in Brighton, Michigan as a dining supervisor and an activities assistant. Andrew’s passion to help people is unlike any other, and he continues to strive to be best resource he can be. Andrew graduated from Cleary University in Howell, Michigan with a double major and currently resides in Brighton, Michigan.





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