Lessons Learned From Not Selling My House
Back in the summer of 2012 I decided to test my house on the market to coincide with the Facebook IPO. (Should I Sell My House As Facebook Goes Public?) Although I didn’t want to sell my house, I was in a peculiar stage in my life where I was just coming off my WARN Act income after leaving my job of 11 years. With the great unknown ahead and a recovery in the housing market, maybe, just maybe I could entice a newly minted Facebook millionaire to buy my house for top dollar. With the cash proceeds I’d immediately fly to Vegas and bet it all on black to double my money! Just kidding.
My realtor was a tennis friend of mine who hounded me for literally a year to give him the listing. Because I was so reluctant to sell, I basically told him to list 5%-8% above the market hoping that my house would either not sell or I’d find an avid buyer and have no choice but to sell. It’s always a good idea to underprice your house in a hot market to create a bidding war. Overpricing is a buzz kill. The listing also gave me an excuse to finally paint my living and dining rooms I’d been putting off for years.
After about three and a half weeks on the market with several serious inquiries but no silly money I decided to pull the listing. My realtor begged me to keep the house up for a couple more weeks but I was sick and tired of the private showings. Deep down I continued to feel like selling at that time was a mistake given the recovering markets. But I also felt a little bad for my realtor given he spent so much time decorating and working on the marketing material. However, as soon as I thought about the six figure commission I’d have to pay, the guilt was replaced with disgust at the collusive pricing structure in the real estate industry.
Now that a year has passed, I can honestly say that I’m ecstatic to have kept my home. For starters, my house is my home where I plan to continue making great memories. Financially speaking, the real estate market in San Francisco has moved up anywhere from 8-30% depending on who you talk to due to a tightening labor market and continued low inventory. Prices are up about 12% nationwide YoY in April 2013 so the 8-30% range is in the ballpark.
This post will hopefully help homeowners who are thinking of selling or renters going through the process of buying in a recovering real estate market. Price gains should slow with the recent rise in interest rates, although you never know now that the herd is running in full force!
LESSONS FROM NOT SELLING A HOME
* Realtors are getting very aggressive. As soon as I took my home off the market I started getting large quantities of letters in the mail by random real estate brokers pitching to re-list my house. They were like sharks circling fresh chum. I repeatedly told the sharks I was just testing the market and really didn’t want to sell for less than a large aspirational price but they wouldn’t listen.
One real estate agent simply had her business card in the envelope that said, “Call me!” If she looked like Jessica Alba, I’d call her, but she was far from the case.
Another real estate agent sent a manila envelope containing about 50 pages of recommendation letters and previous sales. Impressive! When I e-mailed him to inquire more, his pitch was the classic, “Best to sell now before interest rates go up!” I decided not to respond.
Another envelope contained a letter from an agent saying he sold my house a long time ago, and would love to sell it again. He was more factual in his pitch, stating that inventory was down 50% year over year with increasing pent up demand. I told him thanks, but I had already made up my mind to not sell.
The most memorable letter came from one real estate agent who said she loved my house and had a client who was willing to pay more than my asking price. She wrote, “I am convinced he will pay XYZ.” Brilliant! I had her stop by my house to take a look again. While she was here, I realized she didn’t remember my house at all. She basically got herself in the door to make a pitch to become my new listing agent. That tricky woman.
Given inventory is down 45-50% year over year in SF, commissions are also down 45-50% for the year. Real estate agents need to hustle more to get business as a result.
* Many real estate agents focus on the quick buck. None of the real estate agents took the time to hear my story about just testing out the markets and selling only if I get a major overbid. If they bothered to listen, they would know that in a couple years time I am seriously considering relocating to Hawaii. All the agents were interested in was pushing their own agenda to earn an immediate commission. Buying and selling a home isn’t as easy as flipping a switch.
One agent sent me the listings of four comparables that recently sold nearby instead of sending me the last three listings HE sold in order to demonstrate his experience. When I asked again he eluded the question and literally wrote back, “Now is the best time to sell! Let’s rock and roll!” I learned the agent had never sold a piece of property before. No thanks buddy.
Agents please take the time to listen to your clients’ needs. Play for the long game instead of always trying to search for instant business. If you focus on 10 clients who all plan to sell in 1-2 years, in 1-2 years you’ll have more business than you can imagine. Your clients will be so pleased with your patience that they’ll recommend you to all their friends. Nobody likes a hard sell, especially from real estate agents who don’t have the best reputations.
* Hold on for the long term to build real wealth. It’s important to give your property time to compound in value. Owning for less than 10 years is suboptimal due to the ridiculous commission fees and transfer taxes. Think back to how much wealth our grandparents created after decades of holding on to their homes. It seems like the younger the generation, the more impatient we are.
Treat your house as a home first, and as an investment a distant second. During the past eight years of ownership, the principal value owed has declined by over 20% while my mortgage interest rate has gone from 5% down to 2.625%. The mortgage payments are on autodeduct so I don’t even feel the cost of homeownership, except for when property taxes and random maintenance projects are due (Read: How To Lower Your Property Tax Bill). The other surprise has been the rocket ride in rents.
Your house could seriously be your biggest surprise financial windfall if you simply focus on enjoying life and using your disposable income to invest in other assets.
* What seems expensive now will seem just as expensive to future generations. I’ve been seriously looking at property for the past 13 years and I never thought prices in desirable areas were ever cheap. Part of the reason was due to my lack of finances. Another reason is due to increasingly expensive tastes. I am no different from all of you. Very few of us want to live in the same crummy apartment with a bunch of roommates as we grow older and accumulate more money.
Every time I think prices can’t go higher, they seem to breach new highs with enough time. At least once a month for the past 12 years I go for a 3-4 mile jog around the neighborhood during Sunday’s 2-4pm open house window. Back in 2007, I thought there was no way a 1,400 sqft two bedroom, two bathroom flat would sell for $1.35 million.That unit ended up selling for $1.5 million! Surely, that was the high water mark, and it was for the next five years. But then just recently a similar sized flat in the same location sold for $1.65 million.
The rental market is even more surprising. A two bedroom in a great neighborhood used to cost $2,200-$2,800 10 years ago. The same apartment now costs $3,500-$4,500 a month. I know because I’m charging in this price range with my latest tenant. Inflation is a wonderful thing if you own real assets. Don’t be a price taker. Be a price setter.
* Open houses do create buzz. One of the main conditions before I agreed to list my house was no open houses. I didn’t want lookie loo neighbors and strangers going through my house that I probably wasn’t going to sell. I didn’t want potential thieves figuring out a game plan to rob me some time in the future. Open houses are intrusive, dangerous, and more for the agent to pick up prospective clients than for generating demand.
The fact of the matter is that in order to generate top dollar, you need as many people walking into your property and telling their friends and agents as possible. It’s a numbers game when finding a buyer. One of the triggers that pushed me over the edge to submit a bid in 2004 was because I saw a doctor couple sitting in the living room talking things through. A sense of urgency came over me to buy, even though I had just bought my first property a year and a half ago.
Not only is it worth it to have at least two weekends of open houses, I suggest then setting a deadline for offers three weeks after the house is listed if you are in a hot market. The deadline gives buyers time to get their financing in order, while creating an extra sense of urgency at the same time.
* Ask yourself where you’re going to go. I took a look at several rentals before and during my house listing. What I found was depressing. One dingy two bedroom property for $2,800 a month and no parking literally had 40 people at the open house when I went. I submitted an application and didn’t even get a response. This is partly the reason why I respond to every tenant’s e-mail as a landlord today. Ignoring someone who has taken the time to submit an application and provide private financial information is unprofessional.
After striking out on a couple properties, I began to worry that I’d never find a suitable place to live for under $3,500 a month. Sure, there are places for $4,000-$5,000 a month but there was no way I was willing to throw that much money away on rent every month. I also didn’t want to buy another place because that would defeat the purpose of selling to be more mobile.
If you plan to sell, definitely have a very concrete idea of where you plan to live afterward. You might just get shut out otherwise.
* Make sure your realtor’s experience matches your home’s status. Because my realtor was a tennis friend, I failed to do as much due diligence on him as normal. He never sold a house in my price range before, which means he doesn’t have the installed clientele for the initial buzz. The last place he sold was less than 50% the value of my current house.
The other thing I totally brushed aside was that his own property went into foreclosure just several months before listing. Instead of seeing this as a warning sign for someone who might not be thinking straight, I was empathetic instead. I rationalized that at least the large commission would help him shore up his finances.
My future real estate agent will have a multi-year history of selling homes at my price range and higher. He will have a web presence and already be a top producer. He also won’t show properties in sweaty clothes after a tennis match! There are definitely great realtors out there. You’ve just got to search hard to find them. (Read: How To Find A Good Realtor Because Mine Sucks)
* You are instantly destroying wealth if you sell. This is one of the biggest reasons why I did not want to sell. The real estate industry is a monopoly that has successfully maintained its 5-6% selling commission despite a massive increase in property prices in the past hundred years. Even with the invention of Zillow, Trulia, and ZipRealty, commission levels have not dropped. Even with a 45-50% decline in inventory resulting in a 45-50% decline in commission revenue, realtors aren’t willing to budge. It’s still worth checking out Zillow.com to see what the latest comparables have sold for. (Read: Why You Can’t Trust Zillow’s Estimates)
You would think that if your business is down 50% a year for years you’d lower your prices right? Not the stubborn real estate industry. They’d rather starve than see their precious commission levels get cut. Given they’d rather starve, then let’s let them starve! 85%+ of homes are found on the internet nowadays. What do we need a real estate agent for? I can go on the Multiple Listing Service site (sfarmls.com for Bay Area) to search for my own homes.
As a seller, I can list my home on the MLS and Craigslist with terrific content and pictures for all to see. I can pay a lawyer $1,000 to draft up a sales document so why would I pay a real estate agent $100,000+ in commissions? It’s absolutely stupid to pay 5-6% commissions, especially in places with high median home prices. There should be a flat rate because it doesn’t take 100% more effort to sell a $2 million dollar home than it does a $1 million dollar home. Until there is a reduction in commissions, I will not sell. It’s my way of going on strike.
HOLD ON FOR AS LONG AS POSSIBLE TO BUILD WEALTH
Going through the selling process has taught me that selling is a suboptimal way to build wealth for the long term. Plenty of people who sold stocks, bonds, property, gold, and businesses over the past four years are probably regretting their decision now. The only people who don’t are those who successfully reinvested their proceeds into another appreciating asset or who decided to simplify their lives, which is something I’m always looking to do.
If I sold my house last year I would probably try to kick my own face everyday for months if I had the flexibility. In a twist of fate, the lack of marketing ability by my realtor and the industry’s refusal to lower their commission rate kept me from aggressively selling my house and losing out on another year’s worth of gains. Of course if the market was in decline, this would be an entirely different post. But as I wrote in my 2013 predictions, real estate is going to be a hot asset class over the next 12 months.
If the commission level was dropped to 3% or less, I probably would have sold. If my house was a stock, I definitely would have sold because the transaction cost would only be $7.95! Why not lower debt with a decrease in income? This would be the classic “sell too soon” syndrome I suffer from due to impatience and fear of missing out. (Why I Dislike Investing In The Stock Market Even In Good Times)
I encourage everyone to hold on to your property for as long as possible. Keep inventory lean so that the real estate industry finally starts lowering their commissions. The less inventory there is, the higher prices will go as well. There’s no barriers to entry to becoming a real estate agent which is why so many people have bad experiences. When you find a great real estate agent, hold on to him or her for dear life.
I strongly believe property and rental prices will continue to move higher over the next three years. There will likely be a pause in appreciation as interest rates go higher, but so long as you focus on enjoying life in your property rather than the noise, you’ll be fine. Enjoy your home and sell only when it’s absolutely necessary!
STRONG RECOMMENDATIONS FOR OWNERS OR NEW OWNERS:
* Make sure you refinance your mortgage. If you haven’t refinanced your mortgage in the past 6-12 months, I strongly suggest you at least check the latest rates online with Quicken Loans, the largest online mortgage retailer. Rates have been ticking up in 2013 and could surge higher with the end of Quantitative Easing. They were founded by Dan Gilbert, also owner of the Cleveland Cavaliers. Because they have the largest online network, they can provide the lowest rates. They also seem more streamlined in the refinancing process than traditional bricks and mortar banks as well. Interest rates are at all time lows and won’t stay this low forever. My latest refinance was for a 5/1 jumbo ARM at 2.625% from 3.125%. Might as well check because it’s free and there’s no obligation.
* Check Your Credit Score: Take a moment to check your free TransUnion credit score through GoFreeCredit.com, a company I trust. 30% of credit reports have errors, which could put a serious hamper on your refinancing or new loan borrowing abilities. I had a $8 late payment I didn’t even know I owed crush my score by 100 points come up during my last refinance! If you don’t want the credit monitoring service, simply cancel before the grace period is up.
* Get the best home insurance possible. In order for your property to grow in value you must protect your property from damage. Fires, floods, leaks happen all the time. If you have cut-rate insurance, you could very well pay way more than you should. Maintenance costs add up over time. I recommend USAA for all your property and auto insurance needs. USAA was founded in 1922 to serve our honorable servicemen and women and have since opened up to the public to provide the absolute best service and some of the best rates. Not only do I have my home and auto insurance with USAA, I also have an umbrella policy as well as three CDs totaling roughly $500,000 with the company. I’ve been a client for over 20 years given my father served in Vietnam and I’m a huge fan.