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Adventure! Risk! Real Estate!

“The purpose of the margin of safety is to render the forecast unnecessary.”  Ben Graham

I’ve crossed Lake Michigan in a 26’ sailboat that almost sank at the 45- mile mid-point. On the 142 mile Kokopelli mountain bike trail, from Fruita to Moab, I was keenly aware that people had died on the route. Crossing a mountain pass at 12,000 feet on a road bike had some risk and my 10-day bicycle trip in Cuba was, well, risky.

 In my adventures, the goal   has always been to have a   margin of safety. We take   the same approach with   our  clients when   purchasing real estate   which, in today’s market,   can be adventurous.

Buying a home or   undertaking a home   upgrade/makeover has risk, and the room for error is different for all based on individual financial and mental abilities – said another way, where do you stand if the financial outcome is imperfect?

To Graham’s point, get the information you need to keep a margin of safety.

What is our approach to home makeovers? I’ll explain it with a recent analysis by Seamus Holloway, who answered just such a question for a past client.

The question involved a garage. Generally speaking, we look at existing value, post-upgrade value and where that leaves the client in terms of neighborhood value. Whether buying a home or upgrading a home, information helps our clients with their margin of safety.

Should the garage be built? In no particular order we used the real estate version of the Socratic Method for answers and asked:

1. Will the Homeowners Association (HOA) and municipality allow an additional detached garage to be constructed? If yes, verify in writing where it can be built.

2. What is the cost to build the garage? Will it be heated, ventilated? Will the roof be metal or shingle? Does the municipality or HOA have a design review process?

3. Most importantly, what are the area values relative to when you purchased the home? What is the post-upgrade value on project completion? Is the risk-reward such that the project makes sense?

Seamus prepared an analysis to give the clients a sense of where they would stand if the improvement was undertaken.

The analysis suggested an appreciation rate of 2% over the past 1.5 years (low relative to historic appreciation of 3%) which may have been the result of few sales in the subdivision. If the cost of the garage was $30,000 or less, the opinion was the client would not have over-improved the home for the area.

In recent months we’ve helped a past client with their tax assessment (it was reduced), counseled a past client on whether or not a bathroom update was a good use of money (it was) and resolved a mortgage refinancing question (lowered rate).

Like adventure, smart housing decisions should be based on information, not emotion. If you are a past client, or a potential new client with a housing question, feel free to contact us.

If the process takes more than 2 hours, we will ask you to make a donation for our time to a local food bank. In this way, everybody wins.

Thanks for reading,
Michael D. Holloway

Homebuyer Associates

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Homebuyer Associates
1835 N. Riverwalk Way
Milwaukee, WI 53212
Phone: 414-254-4129