It’s no news that the housing market collapsed five years ago with a negative impact on the real estate market. Many people especially those affected by the downturn will remember the problems that came with adjustable rates and the numerous number of foreclosures. However, these were not the only problems. Another factor that affected the situation was the assumptions homeowners and investors had in believing their properties would not depreciate. This led them to borrow heavily against their values until they practically had nothing left to get. The problems became real when tenants stopped paying and values dropped. For the past five years, the market has seen a rise in home values. People are now tempted to believe that home values will continue to increase. However, there is a lesson we can learn from the mortgage meltdown, and that is, never to rely on appreciation.
Long-term appreciation cannot be realized through short- term values that results from property upgrades and repairs. Value is added only when you purchase in the right location and you do the correct improvements. The market dictates long- term appreciation. Your property value will increase in value by about 2 percent each year. During the years between 2005 -2008, market values rose between 5 to 15 percent annually. While it appears that it was unlikely to maintain those numbers, investors and homeowners had no inclination that the market was slowing down. That however was the reality.
Several investors mistakenly add in 5-10% to their after restoration value for appreciation. The expectation is the market will make a full recovery in a few years. What if this is not realized? The current real estate market is blooming but this does not mean that it will not change overnight. The fact is, many buyers are currently dealing with unemployment issues and are still indecisive about buying property. With stricter mortgage guidelines over the past year coupled with low interest rates, buyers are in a better position to buy homes at rock bottom prices. These factors influenced thousands of buyers to take advantage of the opportunity to purchase homes. There is no guarantee however, that increased rates and values will keep buyers coming out. The expectation is that the market will continues to climb, but this may not happen immediately and still there is no guarantee that it will ever happen.
Overestimating this price may cause problems with aspects of the transaction. The most likely scenario is that you will do things the wrong way and try cutting costs to save money. Let’s say that you estimate to sell your home $500,000 and the market is asking for $480,000, you may eventually have to settle for less or rent your property and wait until you can get your asking price later. This will leave you with two options, but not exactly, what you wanted. One result of this scenario is that you could find yourself scrambling to break even.
Instead of expecting appreciation, it should be seen as an additional bonus when it does happen. When you view your property as a long-term hold, you won’t worry about monthly or year to year value estimates. It can be stressful to guess where the market is heading. By keeping realistic appreciation estimates, you will be able to minimize future problems with the selling your property.