Hopefully you can benefit from the following anecdote and apply it as useful should a similar situation ever arise in your life.Someone we know, whom I will call Neighbor K (there is no K in this person's name), had a serious life changing event--one of the biggies in every financial plan--last month.
Neighbor K is going to sell the house in Walker and move a couple of hours away to be closer to adult children and grandchildren and will be buying a house in the new location.
Neighbor K plans to try to sell the Walker (the name of the area where we live) house at what sounds like a very high price and the new house will cost the same as the expected proceeds. Neighbor K loves the house and naturally thinks it is worth a lot of money but unfortunately the comps are not in Neighbor K's favor. Only three houses have ever sold in Walker for the figure sought by Neighbor K, last summer more and newer house was sold for 20% less than what Neighbor K is looking for and there is currently a much nicer house not selling for about the same figure.
Neighbor K is on the hook for the new house which will be completed in nine months (as on the hook as anyone can be as I don't know the particulars on how someone gets out of one of these deals).
I am not learned enough in behavioral finance issues to be able to label all of the behaviors exhibited in the story but there are quite a few.
Neighbor K is making a lot of assumptions and things seem like they will have to align perfectly for this plan to work out. Making assumptions along these lines is a very human thing to do. Things like I will outperform the market, I can afford this Harley, my house is worth X, I will enjoy working it until I'm 80 (this is one I make), next year I'll spend less and so on.
This really is a human thing and so it's ok to initially think I will enjoy working until 80 but recognize that type of thought for what it is, an assumption relying on certain positive things working out, and mitigate the reliance on things having to go perfectly (what if I have to stop working at 60?), and maybe have a contingency plan. For Neighbor K, what happens if the Walker house does not sell or if it only brings in half of the amount hoped for?
This not to say you should expect the worst. I'm not sure how it comes across but personally I am very optimistic but do believe in planning in case things don't go as hoped for. If that seems contradictory, fair enough but people get done in by poor decisions or ill-conceived financial plans all the time and because Neighbor K's plan relies on selling one house for a certain amount of money it only makes sense to ask, what if it doesn't sell?
The picture is from a few winters ago. A sinkhole just opened up as the propane truck went by. Our property is sort of triangle shaped and this happened on the point of the triangle that is near the road. That could have been a big uh-oh.
8 comments:
Common sense seems to be on the decline. When taking medical actions with various risks, we are told to go for 2nd and 3rd opinions. Sorta makes sense for really big financial actions.
Yes Common sense is on the decline. People make a lot of unreasonable assumptions. Why do you think people get a credit card to pay off a credit card?
My mother had a similar experience with a garbage truck. On trash day the garbage truck stopped to pick up her trash and then sank 10' into a suddenly appearing sink hole in the alley. The comment from the city was, "We knew there was water leak somewhere in this block. Thanks for finding it!" It took a couple days to fix and they had to add several dump truck loads to fill in the hole.
Unless one has lots of excess wealth, I always advise individuals and investor groups NEVER to buy real estate until they have a contract on the property (or whatever) they wish to sell.
During the time the property is on the market, the seller becoming a buyer should work hard to locate numerous properties to purchase. When their property sells, negotiate a closing date that will fit a moveout.
Then,upon signing the contract to sell the home, the buyer should immediately submit ultra low offers on EVERY property that was deemed desirable to buy. Then, negotiate in compressed fashion to isolate the best deal and negotiate stongly until the lowest price is reached.
This works. And elimiates insomnia.
T
Since Neighbor K bought the house in 1980 and is running a 1800% profit at the lower price,the new house only requires to be a townhouse condo and they can short the homebulders and financials with the balance.
1800%, that is too funny.
Along the same lines as your neighbor's potential problem, there was a really scary event with a friend of a friend some years ago. They were buying a house and thought they had everything worked out to sell their house at the same time--both deals were supposed to be in escrow simultaneously. Then the Loma Prieta earthquake struck and both houses were badly damaged (most Californians still don't have earthquake insurance, and certainly didn't then). Somehow the timing was off just enough that their buyers got out of the deal, but they couldn't get out of the house they were purchasing. So they suddenly owned two expensive houses, both of them requiring extensive work, and couldn't live in either one. Luckily they were in their peak earning years, but even so it took them years to get back to their previous financial position.
Linda
Even back in the days when you had to buy a replacement home within two years of face capital gains tax I got into the habit of renting in a new neighborhood or town for a year before buying (usually stored part of the household in the meantime): Allowed me to discover more desirable neighbors and neighborhoods -- sometimes you can't tell until you park on the street at night and just listen -- as well as more history or even better deals in the area when you talked with the residents. Local moves are cheap so that was not a consequential expense afterward and of course the risk of getting caught with more homes than desired was nil.
PS: Many years ago, on a construction job I was running, a loaded cement truck broke through an old septic tank vault; man oh man was that a mess, thanks for the memory.
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