Don't stay a renter forever

Why home ownership is smartest way to build wealth

By Bernice Ross
Inman News

Are your buyers waiting the market out? If so, here's how to get them off the fence and under contract.

One of the most important questions agents and brokers are asking today is, "How can we persuade our buyers to take action now rather than waiting?"

Many buyers are convinced that waiting will allow them to buy the property at a lower cost. This flawed thinking fails to consider the true costs of home ownership, not only in terms of tax consequences, but also in terms of wealth accumulation.

A down market -- the ideal move-up market

If you are in a market where there is price depreciation, this is an ideal time for your move-up owners to purchase a more expensive home. Assume that your buyers paid $300,000 for their property and the market has declined by 10 percent. Their property is currently worth $270,000. If your clients are going to purchase a property that was $600,000 a year ago, it's now worth $540,000. By purchasing this year, your clients have an instant $30,000 in savings as compared to a year ago. Furthermore, their mortgage and property taxes over the next 30 years will be substantially lower as well.

If your buyers are retiring or trading down, most real estate cycles are approximately 10 years in length (i.e., it takes 10 years to cycle through a seller's market to a buyer's market and then back to a seller's market.) If your seller can afford to wait a few years, they may be able to catch an appreciation increase later. On the other hand, they have the cost of maintaining the larger property rather than having lower overhead and more cash. To understand the exact financial ramifications, advise them to meet with their CPA, tax attorney or financial advisor before listing their property.

It's cheaper for me to rent!

How many times have you heard that objection? If you live in a pricey area, it's true that many may be unable to buy even an entry-level property. For them, renting makes sense.

On the other hand, the interest rates are so low that purchasing usually makes more sense. To illustrate this point, begin by using one of the online "rent versus buy" calculators. (Move.com has a good one.) According to the U.S. government, the average rate of inflation for the last 10 years is 2.54 percent. Check your local census or multiple listing service data to determine how much properties in your area have appreciated over the last few years as well. Furthermore, the longer a person stays in the property, the more substantial the savings are. Here are two examples that illustrate why renting is not usually a smart idea:

Example 1: Assume that your first-time buyer currently pays $1,500 per month in rent and plans to purchase a $300,000 property with $30,000 down and a $270,000 loan for 30 years at 6.25 percent. Your buyer is in the 28 percent tax bracket and will own the property for eight years. Appreciation keeps pace with inflation at 2.54 percent per year. The estimated cost of renting is $142,016 versus the estimated cost of buying, which is $117,754.04. The buyer saves $24,262 by purchasing rather than renting.

Example 2: Your buyer currently pays $2,000 per month in rent. The buyer plans to purchase a $400,000 property with $40,000 down and a $360,000 loan at 6.25 percent. The buyer is in the 28 percent tax bracket and will own the property for 10 years. The property will appreciate at 5 percent per year. During the 10-year period, the estimated cost of renting is $241,189 as compared to the estimated cost of buying (due to appreciation and equity build up), which is $68,905. The buyer saves $172,284 by buying rather than renting.

What if the prices go down?

Laurence Yun, the chief economist for the National Association of Realtors, shared the following facts at NAR's mid-year conference:

From 1995 to 2004, the average renter accumulated $4,000 of wealth. In contrast, the average homeowner accumulated $184,400. (See his presentation on "Marketing to Gen Next" slide 47 on Realtor.org.) To account for the difference of $180,400 of wealth accumulation, a $300,000 house would have to decline by 60 percent.

What many people fail to consider is that homeowners accumulate wealth by paying down their mortgage, even if their house does not increase in value. Renters lose additional wealth as their rental payments increase over time, whereas a homeowner with a fixed-rate loan has locked in his or her mortgage amount for the next 30 years.

If your buyers are sitting on the fence, help them understand the benefits of taking action in today's market. The best way to do that is to show them the true cost of home ownership and how taking action now benefits their long-term wealth accumulation.