NEW YORK (Money magazine) -
Real estate prices are still on the rise, but rumors that housing is poised for a fall has some investment-minded homeowners ready to cash out and rent for awhile.
A word of advice? Think again.
Here, we've identified some of the most frequently asked questions among homeowners looking to sell, from whether the sell-and-rent strategy actually works to whether commission fees really pay. We've also explored the benefits of home improvements - and how to get your money's worth on the resale market.
Plus, if you're serious about moving up in the world, you can use our calculator to determine how much your payments will be on your new pad.
1.) Should I sell now while the market is hot and rent until things cool off?
No. If you're not put off by the odds against timing the market, at least consider the costs you'd incur by selling. There's the 5 percent (at least) commission for a real estate agent; on a $300,000 house, that's a $15,000 cut. Then you should factor in lost tax savings. If you had a $250,000 mortgage on that $300,000 house, the tax deduction on mortgage interest was saving you $4,300 a year, assuming a 30 percent bracket.
You'll need a mortgage once you decide it's time to buy another home--figure on $2,500 in closing costs, maybe more in pricier places, like Florida, New York and Texas. Then there's the possibility that interest rates won't be so appetizing by the time you decide to jump back in. On a $250,000 30-year mortgage, the difference between rates of 5.75 percent and 8 percent works out to about $4,500 a year.
Add it all together and the fixed costs associated with selling that $300,000 home today, renting for two years, then purchasing a new home in 2005 would be $22,000, assuming 30-year rates stay at 5.75 percent, and $26,500 should rates climb back to 8 percent. In other words, home prices must decline at least 10 percent for this gambit to pay off. It could happen: Median home prices fell 20 percent in Houston in the late '80s, and 10 percent in New York City in the early '90s. However, regional declines of 10 percent or more are so rare--and the hassles associated with moving so great--that it seems foolish to wager on your community becoming the next Houston.
2.) Any way around those 5 percent agent commissions?
Nobody likes paying 5 percent or 6 percent commissions to real estate agents, but there's a reason why 95 percent of sellers still use Realtors. Going "fizzbo" (for sale by owner) doesn't always save money. Skilled real estate agents can pay for themselves by helping owners make homes more marketable. Also, agents' almighty multiple listing service (MLS) can reach more buyers in a day than most do-it-yourselfers could in a month.
(Click here to compare real estate agents in your neck of the woods.)
That said, you don't need to go agent-less to save on commissions. Offering your agent an exclusive could help you negotiate a lower commision. Additionally, discount Realtors like eRealty.com and YHD Foxtons offer commissions ranging from 3.5 percent to 4.5 percent -- a price that includes an MLS listing. Finally, some traditional agents now offer rebates or frequent-flier miles. If you sell a $500,000 home through GMAC Real Estate, for example, you can earn 125,000 Delta Skymiles. And what better time for a vacation than right after moving?
3.) Which home improvements will add the most to my home's resale value?
Real etstate pros agree that making home improvements solely to increase your resale value is rarely a good idea, because getting your money back is not a sure thing. But some home improvements are indeed savvier than others.
For starters, upgrading your home's basic infrastructure can be a good bet. Sure, installing a larger water heater, a better electrical system or a new roof, windows or air-conditioning system isn't terribly sexy stuff, but a prospective buyer will likely adjust the offering price to make those alterations if you haven't already done them.
Next, buyers most consistently want the bathrooms and kitchen remodeled. The average homeowner recoups 70 percent to 80 percent of these remodeling costs, and returns tend to be even higher in pricier areas, even if the costs are more. In San Francisco, for instance, you can expect to get back more than 130 percent of your investment in a new bathroom or kitchen.
That said, don't overdo it: Buyers won't pay dollar for dollar for your marble floors, but they will pay full price (and sometimes more) for something clean and efficient. Use neutral colors for bathroom tiles and don't stray too far from classic styles when buying fixtures. Same goes for the kitchen: Go with white cabinetry rather than wander somewhere zoomy. "Restrain yourself as much as possible," says Bridges, who's clients range from software designer Peter Norton to Sean (P. Diddy) Combs. "Save unique tastes for furniture or less important rooms of the house." Or let loose on the commerical appliances. "Words like Viking and Sub-Zero go a long way on real estate listings." Other good bets include renovating your basement and adding a family room or bedroom. Dicier moves: building a home office, remodeling children's bedrooms or installing a home gym or swimming pool.
Lastly, don't overspend. Putting a $50,000 kitchen filled with state-of-the-art appliances into a $150,000 home probably isn't a great idea. You may choose to do it anyway, especially if you plan to live in the house for the next 20 years, but don't expect to recoup your investment. Someone looking to buy a house in a $150,000 neighborhood won't dish out another $50,000 because you souped-up the kitchen.