February 24, 2005

Homer: Hey Kid, where are you going in such a hurry?

Kid: I'm headed down to Better Homes to see about selling our house.

Homer: Can I ask why, I was just starting to get used to you.

Kid: No problem Homer. We have been here five years now and the value of our property has been going up every year so the wife and I  thought we'd take a look at selling it and buying another place. All of our profit is sheltered from taxes so long as we buy a property of equal or greater value. And Homer, if the new place is newer and in an attractive neighborhood, it should go up in value even faster than this one. What do think?

Homer: Flawless logic.

Kid:  You're being facetious aren't you?

Homer:  A bit.

Kid: So what's wrong with the idea?

Homer: Nothing, only you make it sound as though you have no risk.

Kid: What risk is there? We sell the house, buy another, sell it, buy another and just keep compounding our profits. Beats the market!

Homer: Sounds pretty good to me but you are leaving out  very important considerations.

Kid: What might they be Homer?

Homer: Unlike the stock market Kid, there is no instant liquidity. You won't sell the house for what you want, or heaven forbid, you won't get what it's worth, and you may pay too much for the one you buy to replace it. So in the end, you are holding onto something you wanted to get rid of from the start but now you're stuck with it. Since your new home would have a higher value your maintenance costs are more. And then there is the problem of marketability. Unless your living, which you are not, in one of the nations four hottest real estate markets, what you suggest is pure fantasy.

Kid: Well that's what the broker told me.

Homer: I have a problem with brokers and mortgage companies.

Kid: How's that?

Homer: Look Kid, your broker or at least your broker's firm can also represent the buyers. I see an immediate conflict of interest particularly when they want you  to take a lower price. There is no incentive for them to raise the price of your home even if it is undervalued in the market or hold out for a higher price. They make a 6% commission and  the buyer and selling brokers split the commission in half. The salesperson on both sides gets 1.5%. So for the seller to push for a higher price or have you hold out for the original sale price will only add pennies per thousand to their commission. If they hold out and had to wait as apposed to pushing to sell it now at a lower price, there is absolutely no incentive for them to do so because they won't make much more. Since they often work both sides of the deal, a huge conflict of interest constantly looms overhead. It is particularly dicey when the same brokerage firm represents both the buyer and the seller.

Kid: Come on Homer, these folks are fair, they have laws to adhere to and regulations to follow.

Homer: Uh huh, I suppose they are doing there very best not to make it appear to obvious there may be a conflict but some of the latest studies show that when they represent you or I in a deal, it usually comes out on the soft side as to when they represent themselves selling their own property. In other words Kid, they make more selling their own. Although it may take a bit longer on average for them to sell their own property than yours, they will make more because they have a vested interest to do better for themselves than you.

Kid:  Where do you get this stuff Homer?

Homer: I read a lot. But, I'm not through Kid. There's the mortgage companies.
 

Kid: What's wrong there?

Homer: Everything. Who do you rely on for your best mortgage deal when you buy a new house?

Kid: My broker.

Homer: Chances are the only time you will shop mortgage companies is when you want to refinance the house you already own. Then you will look to find the best deal. The deal you get now is not always the best and there is the pressure from the broker to close the deal now so as not to lose the purchase if your buying and/or lose the sale if your selling.

Kid: So how do you buy your houses?

Homer: Cash.

Kid: You got to be kidding me?

Homer: Not really. I use the money I borrow from my securities account to buy the real estate I want in order to own it outright. I pay only interest on the money at slightly above the Prime Rate. You know what that is Kid. It is the rate of interest the banks charge their best customers.

Kid: That means your interest rate is less than 2%.

Homer:  Wow, a mathematical genius. I would never have guessed Kid. And you know what, there's no credit check, no credit score, no principal payments and I own the real estate outright, free and clear. So unlike most, I won't be paying the bank or mortgage company four or five times what the property is worth over the years of their loan in order to own it because that money will now be in my pocket compounding interest and income for me.

Kid: What do they call this technique Homer?

Homer: Thinking outside the box kid, thinking outside the box.