The Wall Street Journal – September 20, 2021
When people say they “fell in love with a house,” they would do well to remember another common saying: Love is blind.
Overcome by strong emotions, potential buyers of the biggest investments of their lives overlook things like a lousy view, choppy floor plan or ancient mechanical systems. Likewise, would-be sellers are often so eager to sell—or so in love with the homes they’re leaving—that they are blind to the house’s fixable flaws, or to the need to plan for capital-gains taxes.
And that’s how it goes in normal times. The current frenzied real-estate market is only exacerbating those emotion-driven mistakes—with buyers feeling they need to do anything to get a house, and sellers cutting corners to take advantage of a hot market. The result is that some buyers are overpaying for the house they’re buying, while some sellers are leaving money on the table.
To help restore some common sense to potential buyers and sellers, we asked financial planners, real-estate agents, interior designers and other professionals to name the five biggest mistakes buyers and sellers make with real estate.
As Matt Celenza, a financial adviser in Beverly Hills, Calif., reminds his clients: “Buying a house is an emotional purchase, but it’s an investment, too.”
1. Picking a so-so location
Too often, real-estate experts say, people may fall in love with the house, and forgive it for the company it keeps. Maybe it surrounds itself with a lot of noise. Or unsavory characters. Or few places to get out and find peace. In other words, they violate the first rule of real estate: location, location, location.
That has rarely been more true than today, as desperate buyers find themselves pushed out of coveted neighborhoods because of a shortage of available houses.
“Today, in Miami Beach, people don’t care if a house is next to a bridge or if airplanes are flying over,” says Dina Goldentayer, executive director of sales at Douglas Elliman Real Estate in Miami Beach.
Out-of-state buyers have been flocking to Florida in recent years for economic reasons—the state has no income tax or estate tax. Then last year, the pandemic brought in waves of corporate executives who could work remotely from the beach. The inventory of available homes got so low that some buyers felt they had no choice but to make compromises. Sometimes buyers knowingly purchase homes in poor locations because of economic reasons, Ms. Goldentayer says. Perhaps they’re selling a property in California and want to quickly establish Florida residency for the tax benefits. A new school year compels some buyers to purchase in their desired school district, even if the home’s location is less than ideal. And in a supercharged real-estate market, sometimes a home in an inferior location is the only option.
A poor location could haunt today’s buyers when they decide to sell. “You can change your floor plan,” Ms. Goldentayer says. “You can always add a bathroom. You can never change your view exposure or your placement on a street. You may be a seller someday when the market isn’t as hot. Buyers will be more particular in that market.”
2. Buying a house sight unseen
An online listing may include professional photography, 3-D floor plans and virtual walk-throughs, but nothing can replace an in-person visit, says Cindy Stanton, an agent with Parks Real Estate in Brentwood, Tenn.
Such listings can look too good to be true. And, as anybody who has followed up with an in-person visit knows, they often are. How did they make that tiny room look so spacious? And yet a lot of buyers—especially these days with people buying out of state or not wanting to visit a stranger’s house because of the pandemic—are satisfied with the online presentation. Ms. Stanton’s firm recently had a client from California who bought a house based solely on the listing photos. The agent toured the property “live” with the client via FaceTime, pointing out carpet stains and other flaws along the way. Nonetheless, the client waived an inspection and skipped the pre-closing walk-through. After the sale, when the client walked through the house for the first time, she was disappointed, Ms. Stanton says. The house is currently undergoing repairs and upgrades, after which the new owner will put it back on the market.
Buyers’ remorse can also set in when only one person in a couple tours a home, leading to panicked “front-yard decisions,” says Learka Bosnak, a real-estate agent of Heather & Learka at Douglas Elliman in Beverly Hills, Calif. “The last thing you want is to be standing in the front yard of a house you just toured, trying to call your partner who is not picking up because they are in the middle of a work dinner in London,” Ms. Bosnak says. “That’s not the time to decide if it’s OK for you to submit an offer.”
3. Waiving the inspection
In this hypercompetitive housing market, many buyers have been skipping preliminary home inspections to make their offers more enticing to sellers. That’s a big mistake, says Vincent Deorio, an executive with Altas, a real-estate investment and management firm based in Denver.
One of his clients wanted to skip a sewer-line inspection that would assess the piping and identify any blockages. Mr. Deorio persuaded the client to have the pipes professionally scoped with a small camera, which revealed a large crack in a pipe under the street and driveway. Because it was detected early, the sellers were responsible for the $15,000 to $20,000 repair.
In other cases, inspections have revealed layers of improperly laid roofing materials, faulty foundations, and subpar wiring and plumbing concealed by wood paneling. What you can’t see can be costly to repair. Mr. Deorio tells clients to never “judge a book by its cover and to always dig as deep as possible when assessing a potential property.”
Inspections are important even if potential buyers want to raze an existing house to build a new one, says Judy Zeder, an agent with the Jills Zeder Group in Miami. “In an old house, you can have a buried septic tank in the yard or asbestos in the roof or air-conditioning system. Competent inspections are the only way buyers can be sure they can proceed with the teardown and build what they want to build,” Ms. Zeder says.
4. Getting a high-maintenance vacation home
When buying a weekend retreat or vacation home, most people focus on properties they “dream about” and not the cost of ownership, says Will Rogers, a private wealth adviser with Ameriprise Financial in Augusta, Ga. “They often don’t realize that renovations, repairs and ongoing maintenance costs can drain their bank accounts and sap the fun right out of a pleasure property.”
He recently talked a client out of buying a lake house north of Minneapolis that was listed for just under $300,000. It was an older home in need of big-ticket upgrades in the coming years—electrical wiring, the heating system and the roof. It also had a big yard with lots of grass. Buyers don’t want their second home to become a second job, Mr. Rogers told his client.
5. Tying your own hands
Are you prepared to be told what color to paint your house, where to park your car and how often to mow your lawn? For some people, the answer is no.
That’s why buyers planning to purchase a home in any community controlled by a homeowners association should be sure to review the association’s regulations and restrictions, says Kristi Nelson, a Los Angeles-based interior designer. “Otherwise, you’re in for a very rough experience on top of what’s already a mentally and emotionally challenging journey,” she says.
1. Showing the house at its worst
People are so in love with their own homes that they sometimes don’t see its flaws. But buyers do.
“I’m a big believer in the presentation of a house,” says John Manning of Re/Max On Market in Seattle. “We’re emotional creatures. When we walk into an untidy house, we don’t see the house. We see the stuff—dirty laundry, uncleaned Kitty Litter, dishes in the sink.” An unkempt house affects the seller’s bottom line, even in a red-hot real-estate market. “If it’s a $1 million house, you could go down $50,000,” Mr. Manning says. “That’s just leaving money on the table.”
Ideally, he says, the homeowners will move out of the house, which is then staged to highlight its best features. “For a seller, the listing is only the beginning of the process. They need to be prepared to show their home throughout the process.”
2. Not planning for capital-gains taxes
If the sellers’ home has appreciated in value, the profit could be subject to capital-gains taxes. Certain home improvements can potentially reduce the tax bill—but only if the sellers have documentation showing that improvements increased the home’s market value, prolonged its useful life or adapted it to new uses, says Mr. Rogers, the financial adviser in Augusta.
He recently worked with a widowed client who sold her home and moved into an assisted-living facility. Her home had been purchased decades ago for $64,000, and it sold for $457,000. The profit exceeded the IRS’s capital-gains exemption of $250,000 for individuals and $500,000 for married couples, meaning the client faced a hefty tax bill.
The client, who had Alzheimer’s disease, had scanty records on improvements that had been made over the years. Luckily, Mr. Rogers had financial records that documented a new roof, a remodeling project and deck extension—and that proof allowed his client to avoid capital-gains taxes entirely.
2. Mishandling the sale of an estate
The impact of a mistake isn’t felt just when the owner is alive. If a homeowner doesn’t provide a detailed estate plan—and have clear communications with heirs—disputes over the estate can delay or even scrub a home sale after the owner dies.
Mr. Manning says his firm recently worked with clients who wanted to buy a rural property listed for about $500,000. But in investigating the title, the firm realized that the property was involved in a legal dispute among siblings. “There was a strong chance that our client could find himself in a lawsuit fighting claims that the sale to him was improper,” Mr. Manning says. As a result, the potential buyer walked away from the deal.
Similarly, homeowners who bequeath a home to heirs in hopes of keeping it in the family often fail to provide funds to cover the annual costs of maintaining it, says Frank Riviezzo, a New York-based CPA. As a result, the heirs may feel pressured to sell—even if a down market prevents the house from getting top dollar.
4. Fudging facts and flaws
Maybe they won’t notice.
How many sellers have said that to themselves, hoping that buyers won’t see the problem with the roof, or the signs of former water damage—even though sellers are required by law to disclose any known deficiencies in a home.
“When you’re selling a home, you have to establish some degree of trust between yourself and the buyer,” says Mr. Manning. “That’s how you get the highest price for your home.” But, he says, “when you withhold information about the condition of a house, the buyer might get more aggressive if they think you’re hiding something.”
That trust is also eroded when sellers withhold or provide incorrect information that could affect a potential buyer’s offer price. Cindy Cole, a real-estate agent in Destin, Fla., has seen sellers who exaggerated the amount of rental income generated by a vacation property.
5. Steamrolling your significant other
There’s nothing that hurts a relationship like a spouse who buys a surprise house for their beloved. Except perhaps a spouse who sells a beloved’s house. Tim Gorter, an architect in Santa Barbara, Calif., recalls a case in which the husband sold a vacation house without first consulting his wife, who cherished the property. The wife was upset, so the husband hired Mr. Gorter to design her a “dream vacation home” on a property they owned next door.
It took two years to design the home and obtain proper permits. Shortly after construction began, the husband chatted with the owners who had purchased his vacation home—and they were willing to sell it back to him for a profit. In short, says Mr. Gorter, “my client sold his vacation home without consulting his wife, only to buy the property back at a higher price two years later, while paying a handsome architectural commission to design a project on the neighboring property that he never built. Still, the wife was happy she got her house back, and that made the husband happy.”
By Beth DeCarbo
Dow Jones & Company, Inc.