Thursday, April 23, 2009

Obession Pays

I was recently asked about why I obsessed about the housing market. In a nutshell, it makes financial sense to do the research.

People spend time on Sunday's clipping coupons to save $5 - $10 dollars at the grocery store the following week (not to mention the time it takes to find the items on sale). People drive to out of the way gas stations to save 5 cents a gallon (even at 20 gallons, that's only $1). People will go from store to store, and spend countless hours online to save $20 or so on a purchase.

In those cases, the return for the extra time invested is very very small. Not so with housing.

Given my obsession which has lasted approximately 2.5 years, assuming I spent 1.5 hours a day on housing related research during the work week, and also assuming we saved $150,000 on our purchase price (what homes our size sold for 2.5 years ago), I saved approximately $256 for ever hour of my time invested. Totally worth the time if you ask me.

Conventional wisdom encourages people to do independent research on their financial investments (like stocks and bonds). Relying on a commission based broker for all investment advise creates a conflict of interest. This same wisdom should apply to home purchases as well.

10 comments:

Jacob said...

I think that because it is so complex people (wrongly) rely I their realtor, which the think is working in their best interests.

It's easy to see a coupon that gives $x off item y. And you buy item y anyway so you can save money.

mcb44 said...

Completely agree with the value of the effort spent to research the economics of the housing market.

One lesson in particular is to be wary of taking financial advice from salespeople whose training is based on marketing and managing transactions, and compensation structure does not encourage acting in the interest of the buyer.

Jeff T said...

HERE, HERE...

While people believe a real estate works in their best interest you are still at the whim of your agent. As a buyer, your agent is going to want to show you houses they are listing or those within their particular office / company. You have to do the research and ask them to show you houses outside of their broker's listings. As a selling agent, they schedule all of the open houses and coordinate all of the follow-up. They are motivated by their own financial needs as to how to advise a client to accept or counter an offer.

Research has shown a real estate agent acting on their own behalf, because they have insider knowledge of the market and trends tend to hold their own investments longer for a better offer. Think of this, as a selling agent they may only get 1% of the sales price of your home after they do the split with buyer's agent and their own broker. So a $5,000 change in price only reflects a $50 difference to their paycheck. Most agents will tell you not to "step on the deal" for $5000. It is not in their best interest to argue for a better sales price for you.

How do I know this, I just bought a house in Nov 2008 and sold a house in April 2009. And I did my homework at every step along the way and I managed my agent for my benefit.

Jeff T said...

One other comment. Ask your agent to show you a for sale by owner and see how fast they tell you that it is not a good deal to get involved in something like that. Why, there is no money in it for them.

Husmanen said...

Of course I agree too. So far I am still doing well and my hourly 'investment' keeps paying off, probably marginally decreasing though.

Jeff T, interesting, your reference to real estate agents reminds me of a book I read a few years ago, Freakonomics by Stephen Dubner and Steven Levitt. It had a great section on real estate and agents. I would recommend the book to anyone, it is written in a very understandable manner and fun to read.

sacramentia said...

Realtor commissions are one of those things that completely baffle me. There just isn't that much value.

Paul said...

IMO, most people spend more time researching what big screen tv they will buy, than they to researching a home purchase ... the largest financial commitment they are likely to make in their entire lives.

Buying Time said...

When we screened for agents, we asked two questions to see how they handle conflict of interest....
1) Will they put in an offer on a FSBO?
2) Will they double end a deal (represent both buyer and seller)?
If they said "no" to number one or "yes" to number two, they were not for us.

Curious said...

I think it's almost one of those things you have to personally experience once to appreciate everything you need to look out for the next time.

No matter how much advice and experience you are offered, you almost have to experience a bad agent to know what to look for the next time you buy.

By the way, BT/AB I really enjoy your writing, I don't say it enough because I rarely log into google, but I totally enjoy your insights and thoughts on real estate. I look forward to your future posts on homeownership and confess that I still check your blog on a daily basis even though you don't blog that frequently anymore. I apologize for that last run on sentence. : )

Buying Time said...

Thanks Curious. Glad to see you are still around!