The Buy-Low, Sell-High Fallacy + Some Math on 7%

If you’re a seller, I’m sure you wish you could build a time machine back to the spring or summer of 2021, when real estate prices buyers were making offers well-above asking and waiving anything resembling a contingency.

But you know and I know there’s no going backwards, there’s only living in the here and now.

This market—one that’s dealing with the specter of a recession and 7% interest rates—is not one of over-asking offers. Instead, it’s one of price reductions. Prices are going down and will continue to go down for several months, albeit not by the cataclysmic percentages seen in the 2008 real estate collapse. 

Your focus as a seller shouldn’t be on waiting for the next “buyer feeding frenzy” where rates are back down to 3%. No, your focus should be on one single question:

If I sell my house today, will it sell for more than what I paid for it?

That’s it.

Focusing on what matters

Pretend for a moment you purchased your home in 2018—just four years ago—for $1,000,000.

Assuming +10% growth year-over-year (a fairly safe assumption given how crazy the market got in 2021), your home is now worth at least $1,331,000. 

…can all be a part of your investment criteria.

That means you’ve made more than $300,000 in just a few years, not bad at all! 

For the sake of argument, let’s reduce your $331,000 in profit by subtracting closing costs and commission fees—about 7% or $93,000. You’re left with roughly $238,000 in equity. No, it’s not $331K, but it’s also nothing to turn your nose up to either. 

Now, to determine the total amount of equity you’ll have to invest in a new home, factor in the down payment (let’s say 15%) you made in 2018 on that $1 million dollar house. That’s $150,000 to add to your $238,000 in profit.

All together, you’ve got $387,000 in liquid capital to use post-sale to buy a bigger house, a smaller house, a house in a different location—whatever! 

Getting your money’s worth

Think about that number for a moment—$387,000. That’s like having a second job for three or four years, except you didn’t even need to work. You just lived in a house that appreciated in value. THAT is the beauty of real estate…and we haven’t even factored in the tax benefits yet (home improvement write offs, interest payment write offs, etc.). 

(Sidebar—we’ll do a newsletter on all the major and minor tax benefits associated with owning real estate in the months ahead, so stay tuned). 

With that much cash on hand, you could put 26% down on a $1.5 million dollar house.

Or nearly 40% down on another $1 million dollar house. 

That is an impressive feat, and one that will lessen the impact of the higher interest rates banks and mortgage brokers are charging at this time.

Again, your focus as a seller needs to be am I selling for more than what I paid, NOT am I selling for what I would have gotten at the beginning of the year. 

I hear it all the time

“Be sure to buy low and sell high!”

What impractical advice. For many sellers, life circumstances (starting a family, becoming an empty nester, moving for a job, divorce, death, etc.) precipitate the sale of a home. When life happens, you can’t try to “time the market”, you just need to sell for as much as you can get. 

That’s why I say it’s so important to focus on your overall gain, rather than focusing on what you could have sold for last year when interest rates were 3%. Don’t dwell on getting a price that’s in the past—make the most of today’s prices, buyers, and interest rates. 

This is especially true if you’re buying in the same region that you sell in. 

The market kickback

Using our existing example, let’s say you list at $1.3 million, but the best offer you get in this market is at $1.25. As a seller, you might be heartbroken by the fact that market conditions are forcing you to accept an offer that’s $50K below what you feel your house is worth. 

Moreover, you’re probably worried that you’re losing $50,000 of future buying power.

Fortunately, that’s not the case, as long as you’re buying the same region you’re selling in. You see, the $50,000 you “lose” in the sale of your home is $50,000 you’ll gain in the purchase of a new property. 

Why?—Because if market conditions forced you to sell at a discount, the chances are better than good that it’s forcing other home owners to accept discounted offers as well. 

A final thought on interest rates

Look, I’ll just say it:

An interest rate of +7% S-U-C-K-S, let’s not pretend that it doesn’t. 

There’s a lot of hesitation around selling because owners don’t want to abandon the 3.5% (or less!) rate they’re paying for a rate that’s 2X as high. As an owner of multiple properties, trust me when I say I get it.

However, the Federal Reserve (and the broader US economy) doesn’t want interest rates to stay that high. They want lower rates that fuel explosive growth, full stop. So, even if you lock in a 7% rate today, you can expect to be able to refinance in the next two or three years at a rate that’s much more favorable—probably as low as 3%.

In other words, the pain of higher rates is going to be very, very temporary, and the moment the high rates drop, you’ll see the value of the home you purchased at 7% appreciate handsomely. 

(There are also alternative mortgages you can consider if 30-years fixed at 7% is simply unacceptable, including 2-to-1 buy-down mortgages and ARMs—I personally recommend the 7-to-1 ARM if you’re going to go the adjustable route.)

In closing, if you’d like help navigating this crazy market—or if you’d like me to refer you to one of the trusted mortgage brokers that I partner with—please reach out to me about a complimentary 1-on-1 consultation at ShannonShue@KW.com or 310-853-0335.

Believe it or not, I really am here to help. 

-Shannon