Get Your Buyers Off the Fence and Under Contract

by Bernice Ross, Ph.D. MCC
Owner, Teleclass4U.com, LLC and RealEstateCoach.com

Copyright © 2007
RealEstateCoach.com and Teleclass4U.com
All rights reserved in all media.

Are your buyers waiting the market out? If so, here’s how to get them off the fence and under contract.

One of the most important questions agents and brokers are asking today is, “How can we persuade our buyers to take action now rather than waiting?”

Many buyers are convinced that waiting will allow them to buy the property at a lower cost. This flawed thinking fails to consider the true costs of homeownership, not only in terms of tax consequences, but also in terms of wealth accumulation.

A down market—the ideal move up market
If you are in a market where there is price depreciation, this is an ideal time for your move-up owners to purchase a more expensive home. Assume that your buyers paid $300,000 for their property and the market has declined by 10 percent. Their property is currently worth $270,000. If your clients are going to purchase a property that was $600,000 a year ago, it’s now worth $540,000. By purchasing this year, your clients have an instant $30,000 in savings as compared to a year ago. Furthermore, their mortgage and property taxes over the next 30 years will be substantially lower as well.

If your buyers are retiring or trading down, most real estate cycles are approximately 10 years in length (i.e. it takes 10 years to cycle through a seller’s market to a buyer’s market and then back to a seller’s market.) If your seller can afford to wait a few years, they may be able to catch an appreciation increase later. On the other hand, they have the cost of maintaining the larger property rather than having lower overhead and more cash. To understand the exact financial ramifications, advise them to meet with their CPA, tax attorney, or financial advisor before listing their property.

It’s cheaper for me to rent!
How many times have you heard that objection? Granted, that if you live in a pricey area, many buyers may be unable to buy even an entry level property. For them, renting makes sense.

On the other hand, the interest rates are so low that purchasing usually makes more sense. To illustrate this point, begin by using one of the on-line “rent vs. buy calculators.” (Move.com has a good one.) According to the U.S. government, the average rate of inflation for the last ten years is 2.54 percent. Check your local census or Multiple Listing data to determine how much properties in your area have appreciated over the last few years as well. Furthermore, the longer a person stays in the property, the more substantial the savings are. Here are two examples that illustrate why renting is not usually a smart idea.

Example 1: Assume that your first time buyer currently pays $1500 per month rent and plans to purchase a $300,000 property with $30,000 down and a $270,000 loan for 30 years at 6¼ percent. Your buyer is in 28% tax bracket and will own property for 8 years. Appreciation only keeps pace with inflation at 2.54% per year. The estimated cost of renting is $142,015.68 vs. the estimate cost of buying which is $117,754.04. The buyer saves $24,261.64 by purchasing rather than renting.

Example 2: Your buyer currently pays $2,000 per month rent. The buyer plans to purchase a $400,000 property with $40,000 down and a $360,000 loan at 6¼ percent. The buyer is in the 28% tax bracket and will own the property 10 years. The property will appreciate at 5% per year. During the 10 year period, the estimated cost of renting is $241,189.37 as compared to the estimated cost of buying (due to appreciation and equity build up) is $68,905.37. The buyer saves $172,284.00 by buying rather than renting.

What if the prices go down?
Laurence Yun, the Chief Economist for NAR, shared the following facts at NAR mid-year:

From 1995 to 2004, the average renter accumulated $4,000 of wealth. In contrast, the average homeowner accumulated $184,400. (See his presentation on “Marketing to Gen Next” slide 47 on Realtor.org.) To account for the difference of $180,400 of wealth accumulation, a $300,000 house would have to decline by 60 percent.

What many people fail to consider is that homeowners accumulate wealth by paying down their mortgage, even if their house does not increase in value. Renters lose additional wealth as their rental payments increase over time, whereas a homeowner with a fixed rate loan has locked in their mortgage amount for the next 30 years.

If your buyers are sitting on the fence, help them understand the benefits of taking action in today’s market. The best way to do that is to show them the true cost of home ownership and how taking action now benefits their long-term wealth accumulation.