If luck is when preparation meets opportunity, then bad luck must be when lack of preparation meets a threat. Here’s three examples of bad luck in real estate – and how to avoid them.
No, no, I don’t need that extra money – you have it.
In financial terms, the worst bad luck you can have in real estate is paying too much when you buy and getting too little when you sell.
The reason this happens is a lack of preparation.
When you’re buying a home, you need:
- A good Realtor
- The ability to close
- Time to find the home
The first is fairly obvious. Whether it is a buyer’s market or a seller’s market (or somewhere in between), a proactive, engaged agent is how you figure out what’s really important to you in a home and where to find it. With such an agent, you get to know the market and what’s a fair price to pay for what you want. Without an agent who works hard for you, you can end up over-paying for a home because you didn’t grasp all the relevant factors that impact its value.
The second point above is about being able to close on the home you find with your agent. A lawyer to process the transaction, a home inspector lined up, a pre-approval for a mortgage receive, deposit funds ready to go and a buffer for unexpected closing costs means that you are ready to close before you need to close. When you don’t have all of these set up in advance, it can create uncertainty in the eyes of the seller and might require you to make the purchase conditional on various things you could have done before. Either of those translate into less negotiating power, which means you pay a higher price.
The third thing you need when buying a home is the time to find the home. It takes time to truly understand what appeals to you in a home. It also takes time to understand your current market and home prices. Pricing of homes is often inconsistent, with agents or sellers choosing a price they want rather than what the market is paying. If you’re in a rush and haven’t allocated enough time to find the home and close on it, you end up risking settling for a property that you wouldn’t have bought if you had more time to look. When you have the time set aside to search and close on a home (commonly between a month to three months), you remove the time crunch component from the deal and can negotiate a price based on your flexibility.
On the other side of the equation, when you’re selling a home you need:
- A good Realtor
- The best version of your home you can manage
The first is simple. If the home isn’t priced properly, marketed effectively and negotiated aggressively, you won’t get top dollar. Hire a good agent and get good results. Hire a poor agent and get poor results.
The second is more complex. You must have the time and resources (and energy!) to turn your home into its best version of itself. It’s about showcasing the most attractive aspects of the home and minimizing the negative ones. The most common mistake seller’s make is choosing to save money by not making the home look its best and losing far more money in the eventual sale price. There always needs to be consideration given to what projects give you the best return, but if you take a negative aspect of the home and turn it into a neutral aspect, you dramatically increase the positive perception of the home.
Finally, you need to be flexible when you are selling the home. It is absolutely a tremendous inconvenience to sell your home and you need to focus on the end results. While moving out is not necessary, sellers who fail to keep the home looking show-room ready give buyers the impression the home is not cared for and not valued. Similarly, if a seller is restrictive in their showing schedule, they are prioritizing the smooth running of their lives over the sale of the home. Less showings means less offers and that means a lower price.
What day is it? Ah, yes, the day after the warranty expired.
The next example of “bad luck” that happens in real estate is when shortly after a buyer takes possession, things start to go wrong with the home or the property.
- A basement that has been dry and clean for decades can have a sewer outflow line back up due to tree roots.
- An air conditioner that has been a work horse for years can suddenly spring a leak in the compressor and need to be replaced.
- A neighbour who wins awards for their garden can move and be replaced by a collector of garden gnomes that he hides in the long grass and weeds of his front lawn.
- A utility easement can be enforced when some work needs to be done, meaning that lovely gazebo you’ve been enjoying need to be torn down.
While there are genuine examples of bad luck that takes place the day after closing, many of these incidents can be predicted and prevented.
When buying a home, a home inspector can provide detailed lists of problems or concerning aspects of the home. When living in a home, regular preventative maintenance can be done to keep bad luck from happening.
- That basement that has sewer line back up? Hire a plumber to scope it with a camera to see if there are any root issues developing so they can be dealt with before the backup.
- If the AC is near the end of it’s useful life, be prepared to replace it. You can do it proactively or just budget for when it occurs, but knowing that time is ticking for the unit means that when it does happen, you’re ready with the solution.
- When you have a great neighbour, you won the neighbourhood lottery. Outside of municipal by-laws, many aspects of home maintenance are optional and your neighbours can value their home and it’s appearance – or they may not. When buying a home, understand the difference between permanent features of the home and property and those that may not last. A gorgeous home across the street may change over time, but your lot dimensions won’t.
- Your lawyer and agent can and should have informed you about the easement on the property and that the gazebo that was built there shouldn’t have been. When buying, if you treat the gazebo as if it weren’t there and negotiate accordingly, you appreciate it as long as you have it but understand it’s not permeant.
A combination of inspections, preventative maintenance and appropriate insurance coverage can mean that when “bad luck” happens after you move in to your home, it’s the sort of thing you couldn’t have avoided. Most of the other things that make people say “Oh, what bad luck!” can be avoided.
What’s that noise? Ah, yes, must be the market crashing.
The final example of bad luck that people encounter in real estate is perhaps the most dreaded. While overpaying for a home is painful and things going wrong after closing is very frustrating, paying a fortune for a home and then seeing prices drop right afterwards is a terrifying thought to most people.
In reality, the real estate market crashing is more like a real estate market tumble. A crash happens immediately with very little time to react. Stock markets can crash, with stocks and bonds dropping (or raising) in value by significant amounts in a short period of time.
Real estate markets don’t crash overnight. They’re comprised of physical assets that require time to conduct transactions. Agents and clients need to visit homes, offers need to be submitted and negotiated, lawyers need to review and prepare documents, lenders need to appraise and fund deals.
When real estate values tumble, they do so over months, not minutes.
An experienced Realtor knows when market conditions are excessive and when a market shift is likely to happen. There are predictive statistics (sales-to-new-listing ratio, months of inventory and number of active listings) that indicate what direction the market is headed.
While the thought of a market crash taking place right after you buy is terrifying, there are clear indicators when a market is overheated and that is a risk. Even when it begins to shift, there is time to react if a home owner wants to minimize risk. Given the significant transaction costs with selling and buying a home (realtor fees on the selling side and land transfer taxes on the buying side), a market shift needs to be considerable for it to make financial sense to exit the market and rent until the shift ends.
When buying a home, focus on the fundamentals. A good house on a good lot in a good neighbourhood or a good condo in a good building in a good location. These homes will hold their value in market shifts as they weren’t only purchased because they were affordable.
There you have it – three examples of “bad luck” in real estate and the ways in which you can avoid the worst of it. If you’re knowledgeable, prepared and focused on fundamentals, you’ll find people start calling you lucky!