When to sell a home, especially in a bubble!

In this post, I want to examine my prior home sales leading into the bubble.

In December 2005, I sold one home for $176K. I had purchased this home for $103000 in Aug 1998. Taking out repairs, this home made me $60,000+ over 7 years in equity. I lived in it for three of those years, and rented it out for the remaining 4 years.  My mortgage was around $700 a month, later I rented the home for $1150.

In January 2006 I sold my primary residence in north Scottsdale for $369,900 after owning it 3 years and 2 months. I purchased it for $200,000.

Together, those two sales netted me a quarter of a million dollars out of real estate, a nest egg I could never have saved up as a community college professor. And, while I have often been very happy to smugly pat myself on the back for taking the money, and avoiding the housing collapse, recently a nagging voice has been telling me that I could have done even better.

Today, using that money with other savings, I have invested nearly half a million dollars back into the Phoenix market. At this time (August 2012) I have 13 homes, though I have two more short sales under contract, so I could wind up with 15 or so when it is all done. Prices have been climbing swiftly over the past year, and all told at today’s prices, I could sell out and net a little more than a million dollars. So, I’ve started to think about what lessons I could learn from my last sales, through the lens of history.

First sale, $176K Dec 2005. If I check on zillow, I see that it says the value peaked at $280K in late 2006. Zillow is notoriously inaccurate, so comping it by sales from MLS data, I can indeed verify that similar homes sold from $250K to nearly $300K during 2006. Clearly, I left a great deal of money on the table with this sale.

Second home, $369K, jan 2006. By late 2006, according to zillow, this home was worth $445K. Comps bear this out once again.

Clearly, I could have made a great deal more money, selling 8 months later on each of these homes. At the time, my thinking was “you can never predict the peak of a bubble, so get out now because later it will be too late.” And remember, at this point in time, everybody kept reminding me that “there has never been a nationwide drop in prices in the US… etc.” so selling homes to avoid a calamity that nobody else believed possible was a very lonely proposition.

But, now, as I see paper profits piling up again, I want to re-ask myself the question of when to sell. Can I do better this time around, even if we had another bubble? I believe the answer is yes.

You see, it wouldn’t have been hard to predict prices continuing to rise for the next several months, back at that time. Home values are not like stock prices which can change instantly. It is not so hard to estimate supply and demand of homes, you see how many are available for sale of a type, and how many have sold over the past 30 days. Supply was extremely low, everything was getting offers in days, multiple offers in many cases, just like today.  But a year later, sales were slowing and inventory began to pile up. By mid 2007, prices hadn’t dropped much, but there were over 50,000 homes for sale and around 3000 sales a month. The titanic had struck the iceberg, but it takes it a while to fill up with water and go down! Even at that late date, with clear evidence piling up of a crash starting, you still could have sold, if you simply underpriced the entire market in your area. Something still sells, make sure it is your home, period.

Now, with the benefit of history, I see what I should have done:

1. rented the homes with a lease clause that, should I decide to sell at any time, the tenants will cooperate with showings and agree to terminate the lease for say a $1000 credit. [It is much more difficult to sell a home with a long term lease, even today when there are many investors buying. 60% of buyers today are still owner occupants, and they may not be able to get financing, or be interested in the property unless they can occupy it]
2. Let the prices continue to rise, and when supply/demand rises to over 5 or 6 months, get ready to sell.
3. List the home for 5% less than any comparable home. In any market, there are still homes selling, and going into a slowdown you don’t want to screw around, and wind up chasing the market down. Just get it sold immediately. If yours is the absolute best deal, even in a crappy market, you will get it sold.

This would have given me gains of roughly $150K more within a year.

So presently, I plan to make no decisions to sell based on prices, or how much money I’ve made. Rather, I intend to compare supply and demand, and ride price increases until the day the market tells me it’s over.