Don’t let the down market get you down

by CRE on 14 Apr 2015
By Freedom Malhotra

Since most of us have either invested in real estate or are planning to do so, it’s natural for us to keep an eye on how the real estate market is doing. But when the market is down, is it really such a bad thing?  

People tend to assume that when prices go down everyone is affected in the same way. However, that’s just not the case. Firstly, owners of homes that have no plans to sell are not affected in the least by market fluctuations. You can’t assume a gain or loss in real estate until you choose to sell.

But even if you are planning to sell in a down market, not all sellers are affected in the same way.  There are typically four types of sellers in any given market. 

Seller #1: Planning to buy another home of equivalent value. 

In such circumstances, this seller is not affected by a drop in prices because they are not taking their equity out of the market. Though this seller may have to sell at a discount to get their home sold, they will be buying their next home at a discount as well.  

Even by selling their real estate at a lower price than they would hope to get, the first type of seller is not losing money. It makes no sense for this type of seller to wait for the market to pick up again because when prices do go up, they will have to buy their next home at a higher price. These sellers might as well buy the homes they want now and live in them while they increase in value because, either way, there is no financial impact on them.

Seller #2: Planning to buy a more expensive home.  

This seller is in the best position possible because higher-valued homes tend to lose value much faster than lower-valued homes in a down market. By selling their home now they can take advantage of buying the more expensive home they want at a significantly discounted price. 

Seller #3: Looking to cash their equity out of the market with no plans to buy another home. 

This type of seller is negatively impacted by a drop in prices because every hit the market takes lessens the equity they hope to withdraw from the sale. If this seller is unable to wait for the market to pick up again, they should sell fast in case prices continue to drop.

Seller #4: In no position to sell.

This is someone who can’t afford to sell in today’s market because they just don’t have enough equity in their home to be able afford another place. For this seller, it’s best to stay in their existing home and focus on saving up for their next purchase.

Before you can truly appreciate how the market will impact you, it’s important to understand which of the four seller categories you fit into. Not all sellers are alike. A down market only has an adverse affect on those looking to cash out of the market entirely. Chances are, you have nothing to be down about in a down market.
Freedom Malhotra is an experienced real estate investor and Realtor. He is the founder of Condo Planet, which specializes in Mississauga condos for sale.

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