Real estate myths are abundant on the internet. It’s important to discern the facts from clickbait and content written by people trying to establish themselves as experts in an area they’re unfamiliar with. Some articles legitimately debunk real estate myths. The biggest obstacle is misleading titles that claim to debunk myths, but actually perpetuate them.
Incorrect information usually comes from one-sided reporting by people sharing a personal experience with a given situation. Unfortunately, following bad advice can plunge you into a downward spiral, depleting every ounce of financial security you have. One major financial mistake can drain your savings, force you to live on credit cards, and cause debt which will affect your ability to continue investing.
Hopefully, you’ve got a bigger savings account than the 69% of Americans who have a stash of under $1,000—or the 34% who don’t have any savings at all. If you don’t have enough savings to cover a large loss, it’s especially important to discern fact from myth and learn from experienced investors.
Relying on the following myths as absolutes can quickly turn your profits into loss.
3 Real Estate Myths That Can Turn Potential Profits Into Huge Loss
Myth #1: Listing above market value will always give you more profit.
At first glance, it seems like good advice to list above market value. Real estate agents know prices are negotiable, and it seems advantageous to negotiate from a higher starting point. Every investor wants their property to be one that sells above asking price, and starting higher seems like a good strategy to make that happen.
For instance, an inexperienced investor might list and sell a property for $200k above market value, and write an advice piece urging other investors to list above market price. An experienced investor knows listing above market value is a strategy to be used in specific circumstances only. A new investor doesn’t have enough buying and selling experience to differentiate what those circumstances are.
Listing above market value can work in cities like Seattle, San Francisco and the Silicon Valley area where homes routinely sell for more than asking price. In 2013, 67% of homes in San Francisco sold for $41,000 above the listed price. In 2017, a quarter of all U.S. homes sold for 3.1% above listing price.
In 2014, two Palo Alto homes sold for over a million dollars despite being in total disrepair. Despite one of those Palo Alto homes being steps away from noisy Caltrain tracks, it’s a few blocks from a lively downtown area. Also, when parking is scarce, homes with garages sell for more. It’s all about location, and apparently parking.
Attempting to list above market value outside of high-demand cities (or circumstances) can get your listing ignored. You can reduce the price when you don’t get any bites, but according to Nela Richardson, Chief Economist for the brokerage Redfin, if your home stays on the market for more than a few weeks, buyers will become suspicious.
Myth #2: You’ll get a better deal as a buyer without a real estate agent.
When a house is listed with a real estate agent, the entire sales commission is included in the price. When a buyer doesn’t have an agent, the seller’s agent receives the entire commission. In other words, a percentage of the sale price is designated as a sales commission. You don’t get a discount when you buy without an agent.
Myth #3: A small profit on a bad deal isn’t a big problem.
A small profit can become a big loss when you were counting on the deal going through for much more. It takes time, effort, and money to salvage a deal gone wrong. This is a lesson Dave Scherer knows well. As the Principal and Co-Founder at a top-ranked commercial real estate investment firm, Scherer knows his game. Like anyone, though, he isn’t immune to a bad deal. His firm entered into a JV deal that looked great on paper, but turned out to be the company’s smallest profit in 11 years.
Scherer’s firm bought a student housing complex for $14.4 million, but their partner failed to reveal that leasing was down, and he hired his own companies to work on the property without telling anyone.
After investing time and money into maintenance, capital improvements, marketing, and leasing out extra space, they eventually sold the property after owning it a little over a year. Their efforts to revive the situation strained their resources, and their JV partner became a hindrance to their attempts to revive the situation.
Scrutinize All Advice
Take all advice with a grain of salt. Look for the context people may not be sharing. Know the circumstances that make your situation similar or different from the success stories you read about. Property investment advice rarely applies to every situation all the time.
What would you add to this list?