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When Real Estate's in Trouble, Spruce up
Your Home and Finances
As the subprime lending mess sorts itself out, there will be
plenty of conflicting signals in weeks ahead on what you should
do with real estate and your investment picture as a whole. Most
of the advice will be knee-jerk.
Your response shouldn't be.
If you've been working with a financial adviser you trust,
you should already have a plan that insulates you from the worst
the market is dishing up now. When it comes to real estate those
with spotless credit, ready cash and absolutely perfect
properties are the ones who will be in the best position to
successfully cope with this challenging market.
If that doesn't describe you, you should consider doing some
spruce-up work around the house, strengthening your credit
report, and taking a hard look at your long-term plans. Some
ideas:
Should you sell? Do you have a job opportunity in
another city or country you can't refuse? If the answer's a yes,
then it's probably unavoidable that you need to be in the
market. Of course, that job opportunity should pay you well
enough or give you a moving allowance to blunt your hardship
level while you're trying to sell. However, if it's just a
matter of wanting to take advantage of a relatively good price
on another piece of property and you need to put your current
residence on the market, definitely think twice — in certain
markets, homes prices have begun to fall.
Should you buy? Many economists and financial
professionals believe that the pain isn't over in the housing
market. The enormous price increases of the last few years went
unmatched by increases in personal income and were fueled by
rampant speculation, historically low interest rates and lenient
lending standards. If you plan to live in the new house for at
least 4-5 years and have established a solid financial
foundation then you're probably in the best position to make
your investment work long-term.
Is your property in good shape? If you're not in an
immediate position to make a move, then consider improvements.
When the market does recover, buyers won't revert to the
mentality of late 2004 when people wanted property in virtually
any condition at any cost. Buyers will want property in clean,
move-in condition when you decide to put it on the market, so
make sensible investments in landscaping and cosmetic repairs
inside and outside the house.
Should you renovate? Be really careful here. People
always expect renovations to pay off big, and rarely does that
happen — it may take years to recoup your money, much less show
a profit. For a reality check, go to Remodeling
magazine's annual Cost vs. Value report online (http://www.remodeling.hw.net/content/CvsV/CostvsValue-project.asp?articleID=381305§ionID=173)
and check 2006 project cost averages for your region of the
country. In any event, never believe that in a good or bad
market a renovation is going to buy you immediate profits on a
home.
Know how you're going to handle capital gains: When
you sell, remember that married couples can exclude from their
taxable income up to $500,000 of gain and individuals filing
separately can exclude up to $250,000. It's required that you
must have owned and used your home as your principal residence
for two out of five years before the sale. The exclusion is
generally applicable once every two years. However, if you are
unable to meet the two-year ownership and use requirements
because of a change in employment, health reasons or unforeseen
circumstances, then your exclusion may be prorated.
Clean up your credit report: If you're not planning to
borrow now, make sure you're in good shape to borrow later.
Start with your credit report — you have the right to get all
three of your credit reports — from Experian, TransUnion and
Equifax — once a year for free. You can do so by ordering them
at www.annualcreditreport.com,
but do so at staggered times throughout the year so you can
catch potential errors in your report as they happen. Also, if
you need to clean up any bad behavior — late bills, heavy credit
card debt, clean it up before you wander back into the real
estate market. Also, a bad credit score can raise the total cost
of your mortgage.
September 2007 — This column is produced by the Financial
Planning Association, the membership organization for the
financial planning community, and is provided by Don McCarty of
Financial Decision Partners, a local member of the FPA.
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