The idea of homeownership as an investment is to buy a great house at a great price, build equity as its value appreciates, make a life there, then sell it for a small fortune years down the line.
But with a few mistakes, that ideal scenario can play out much differently.
GOBankingRates spoke with two homeowners who had to sell for steep losses and a Realtor who watched helplessly as a client did the same despite his best efforts to create a better outcome.
There are no guarantees in real estate, but you can improve your chances of success by avoiding the following mistakes.
Melanie Wilson, a writing coach for female entrepreneurs, has a horror story about buying an apartment in one of the world’s most notoriously unforgiving real estate markets — and her timing couldn’t have been worse.
“It’s still painful to discuss,” she said. “But here goes. Back in 1987, I was a young, single woman looking for her first place in New York City. I got sticker shock by the price of the rental market and figured buying was a really smart decision. I mean, what could happen to the Manhattan real estate market?”
She found a studio apartment on the Upper West Side that was nice but small — which is par for the course in New York — and signed her contract to buy.
It was October 18, 1987.
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The next day was Black Monday, when the Dow lost 22.6% of its value in the steepest single-day selloff in stock market history. It triggered a global economic meltdown, and Wilson’s new investment was swept up in the tide.
“The next day the stock market crashed, taking the value of my apartment with it,” she said.
She lived there for only a short time before deciding to move in with the man who is now her husband. To avoid selling at a loss, she decided to keep the apartment and rent it, but the hits kept coming.
“My mistake is that I didn’t investigate just how stringent the rules for the co-op board were,” Wilson said. “I was able to sub-lease temporarily; but, when that window ended, I had to sell.”
The value of the apartment was less than half the mortgage, but she had no choice other than to absorb the hit and eat the loss.
“I sold it and spent the next few years continuing to pay for a mortgage on an apartment I no longer owned,” she said. “Ouch!”
Noelle Bruccoleri now lives in Jupiter, Florida, but her hard-luck story played out in New Jersey.
“My ex and I built a house on Lake Hopatcong and overbuilt, for sure,” she said. “Everything was top of the line, and we encountered construction problems along the way, of course.”
Buying a home is expensive, but building one is a whole other ballgame.
According to Bob Vila, new home construction often reveals hidden costs that buyers never banked on — e.g., paying to install sidewalks, sewer lines and utilities — and that often pushes the price 20% higher. Seemingly minimal change orders can quickly add up, as can contractor callbacks and “specials” like gutters and storm drains, which can add hundreds to your monthly mortgage payment.
In Bruccoleri’s case, construction dragged on for six years, and then she learned that her ex’s vision didn’t make financial sense.
“His desire to move out of state and use it as a summer home became cost prohibitive,” she said. “It cost us $1.6 million to build and we lost over $500,000 on the eventual sale.”
Zillow data confirms that she sold the property for $1.125 million in 2017, which means she took a $475,000 hit on the sale alone. Add in fees and expenses, and Bruccoleri left Jersey in a half-million-dollar hole.
The lesson? If you’re considering new construction, you’d better be in for the long haul.
“If you are going to custom build, you need to stay put for a long while,” she said.
Excessive Renovations Can Have the Same Outcome
The hidden dangers of new construction can just as easily creep up on homeowners doing remodels, a fact that Ryan Fitzgerald knows all too well. An experienced Realtor who made Realtor Magazine’s 30 Under 30 list and the owner of Homes Raleigh, he once worked with sellers who overbuilt their way to a loss.
“There was a case where a homeowner had heavily invested in renovations, converting their modest home into a luxury oasis in a middle-class neighborhood,” Fitzgerald said. “Despite my advice to make more cost-effective updates, they insisted on high-end finishes and elaborate landscaping. In the end, they couldn’t recoup the costs as their house was priced well above other homes in the area. The takeaway here is to keep your renovations in line with what’s standard in your neighborhood.”
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