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Issue
2: Fear
The responsibility of home ownership and the magnitude
of the decision can be intimidating, especially to those with no prior
experience or with a negative experience.
Fear is a legitimate
reason for not buying an apartment, especially considering the size of the
investment and the potential risks. Almost everyone experiences some
degree of anxiety when faced with the prospect of buying a home. Usually,
however, lack of knowledge is what precipitates the fear and uncertainty.
Acquiring even a bit of knowledge about the advantages and
disadvantages of home ownership can make you feel a lot more confident
that you are making a wise decision. Performing a full "rent vs. buy"
analysis will enable you to better understand the economic consequences of
each alternative.
One mistake some buyers make is to seek a
"needle-in-the-haystack" apartment that outshines all others. These buyers
view literally hundreds of properties without making any offers. It is as
if they are afraid to commit themselves because they believe that the
"special one" is just around the corner. If you find yourself in this
position, I propose that it would be wise to take a second look at
apartments that you previously rejected. Consider whether there is a lower
price, even if that price is substantially lower, where the apartment
could meet your needs. If so, put in a low offer. Sometimes these bids end
up in great deals. However, think about justifying your offer. Create an
appropriate reason why your bid is a reasonable figure for the seller to
consider.
A good exercise is to mentally create the apartment you
desire and determine a price you would be willing to pay for it. Then,
look in the newspaper. Is that price consistent with prices asked for
comparable properties? Ask a broker if the apartment and price you are
seeking is achievable. If the broker says no, ask him or her to give you
supporting information. It is essential to be informed. Knowledge of the
market will give you the confidence to put in bids in order to take
advantage of opportunities.
Issue 3: Economic Trends
The risks and returns of buying a home may be viewed as less than
ideal in light of current economic trends. I recall reading a newspaper
article predicting that the real estate bubble was about to burst. The
writer noted that prices were ridiculously high, and that any day the
entire market would collapse. The writer was Alexander Hamilton; the era
was the late 1700s and homes were selling for about $100.
Perceptions of inflated real estate values are nothing new.
However, I would place my bet that real estate values will continue to
increase. Consider this: according to bank rules for mortgage lending, up
to 40% of your income can be applied to the cost of carrying a home.
Therefore, for each dollar your salary increases, your ability to carry a
loan increases by about forty cents. However, this is the cost to carry
the loan, not the principal amount. The principal is determined by
dividing this extra money by the available interest rate. For example, if
the rate is 10%, this additional forty cents can support an additional
loan amount of $4.00. Simply stated, for every dollar your income goes up,
you can afford to borrow four dollars more. Do you know anyone who would
be happy next year without an increase in their income? I don't. More
income equals more mortgage, which in turn equals higher values.
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