5 Ways Buying a House is Like Trading the Stock Market
5 Ways Buying a House is Like Trading the Stock Market
By Angie Barbosa:
Hi Real Life Traders! I don't know how best to convey my excitement as I write this article for you; it's so much easier in person, isn't it? How about this? I'm as excited as a kid on the eve of the family trip to Disneyland! As charged up as a credit card at Christmas! As happy as a clam at high tide! I love Real Estate. Heck, I love houses, all kinds of houses. I truly cannot tell you my favorite style; there are simply too many unique and beautiful options. The cool thing about this is that my love for houses fits nicely into my plans to build a solid financial foundation so in that sense my passion feeds my goal, which further enables me to indulge my passion!
I could go on for hours on this topic, but let me start with the very basic act of purchasing a house. Since a home is likely the largest monetary investment we make in our lifetime, it's important to think it through carefully. And since trading the stock market and talking with others who trade is another huge passion of mine, I thought a comparison was in order! Here are five ways buying a house is like trading the stock market.
1~Educate Yourself. Before we plunk money into a brokerage account we take some classes, right? We surround ourselves with other traders, read everything we can get our hands on, write a trading plan, practice with virtual funds, maybe even hire a personal coach or join a live trading floor. Why on earth would we put real money into an endeavor about which we know nothing?! So if we won't (or at least shouldn't) do it with a $1,000 stock purchase why would we dream about doing it with a $250,000 real estate purchase? Whether our purchase is for our personal residence or an apartment building, there are important things to learn before signing on the dotted line. What are your housing needs and wants? Where will this home be? Is it your 'forever' home, or a stepping stone purchase? How long will you own it / live there? How much can you afford to buy? Where will your purchase funds come from? Just as we write out our trading plans, write out a 'purchase plan' and stick to it. Perhaps your plan will require saving up some down payment funds, just as it takes some of us a bit of time to save up funds to open a real money trading account. Talk with friends and family who have purchased houses in the past and learn from their experiences. Browse the web and you'll find many high producing Realtors with terrific blogs as a great source of practical information. Find a helpful financial advisor to run your real estate purchase plans by and ask for their input. Similar to prep before pulling the trigger on an entry order, take some time to do your research and you'll feel less apprehensive when it's time to make an offer on a house.
2~Find the Right One. For you, that is! We all have our favorite stocks to trade and our 'go to' strategies, as well as our nemesis. My preference is for stocks priced around $50 a share that tend to get stuck in sideways ruts, because they're often good for credit spreads. My problem with houses is that there are too many that are 'the right one' for me. I'd be a hopeless house collector were it not for my other passions! One of my favorite activities is to sit around and 'talk stocks' with other Traders, learn their favorites and how they plan to take some money from the market. The research we do into real estate is a step toward identifying our future house and what strategy we'll use to make the purchase. One of the most important tenets we learn in pre-licensing courses for Realtors is that 'Location Location Location' is a very important factor in the real estate game. Imagine my delight when I learned that stock charting has this in common with buying houses! Just as we back trade to familiarize ourselves with different stocks, we drive (and even walk) through neighborhoods of interest and drop into Open Houses to get a feel for different properties. Compare your 'wants and needs' housing list to various homes and you'll get better at ruling out non-suitable homes more quickly. This is akin to keeping your trading plan close at hand and getting comfortable 'moving on' when you notice things about a stock that don't fit your plan. Fortunately for us all, there's plenty of room on the trading floor for all of our individual preferences, and the housing market is no different.
3~Prepare Financially to Make the Purchase. You've shown yourself to be a consistently profitable Trader and have funded your trading account. It took time and scrimping to save up the money, but this is money earmarked strictly for trading and it's time. Or perhaps you're blessed with a well-established account and this step for you looks more like opening and transferring the funds into a brokerage account. Either way, before you can place a trade you must have funds available and it's no different for a house purchase. Some are blessed with sufficient cash on hand, and for you all that will be required is the ability to provide a bank statement or letter documenting proof of funds to purchase. Others will be using OPM (Other People's Money) to purchase, and you should apply and be preapproved for these funds before making an offer â€“ pulling the trigger. Finally, the largest majority of real estate purchases are made using a combination of cash on hand and borrowed funds. Failing to make these financial arrangements before house shopping can cost you a great opportunity, just as an incorrectly or insufficiently funded trading account can result in a lack of ability to get an order filled. Being properly prepared means we are in an excellent position to take opportunities that fall in our paths, in both the real estate and stock market.
4~Isolate Your Target and Do Your Due Diligence. Do this quickly! With your funds ready and available, in addition to all of your property knowledge, on top of your educational foundation, it becomes easier to spot a potential buying opportunity whether you're actively searching or whether it falls into your lap. We will miss some, even many; we all know there are more opportunities for profit in the market than we can possibly take advantage of. When this happens we move on, ready for the next and when one becomes clear, lock it in! Pull up that order ticket, fill in the info, check and double check to confirm, and press Enter. All of these steps leading up to the 'Enter' is your due diligence. You know your plan, the stock you're watching fits your criteria, you're utilizing a tested strategy, your funds are ready and available . . . you know this trade meets your plan, so you take action. When you locate the house you want to buy, you'll do a more thorough check of the neighborhood, local schools, confirm financing with your lender, ask about homeowner's association restrictions and specific features of the house. Neighbors are a terrific source of information! Once you've determined that this is in fact a purchase you want to make, sign the offer and have it presented to the seller! With trading, dawdling over an order ticket can result in a bad fill and diminished profit. With a house purchase, unnecessary dawdling can cost you the house and ultimately, potential for profit.
5~Follow Through. After your position has filled we're done, right? Uh, no . . . Depending on the strategy, we've got a stop order at the very least, normally, and often a close order at a target trigger. These orders and / or alerts are essential to set as soon as our order has filled. This is what gives us the peace of mind to walk away from the trading desk and live life! When we purchase a home we make an offer and once it's accepted our in-depth due diligence begins. There will be contingencies for a home and other inspections (to be sure the home is structurally sound), lending (to be sure your budget can handle the obligation), appraisal (to be sure the house is worth the sales price), and perhaps others. Remember what I said earlier about a house being the largest monetary investment we make in our lifetime? It's also a relatively complicated process with lots of people involved, and hopefully you've got a good team of people to come alongside you on the adventure. These contingencies are like stops in trading. If FB falls back down to $90, close my position; this is my stop. If the home inspector finds that all of the plumbing in the crawlspace of the house is rusted through and will have to be replaced, I have a contingency (a stop) in place to cancel the contract and get my earnest money deposit back with no financial loss to me other than the cost of the inspection. Diligent follow through after a stock or a home purchase is a huge part of our success!
In trading the goal is for the stock to move in the direction of and reach our target, and for us to complete all steps along the way according to our plan and be consistently profitable. In a house purchase the goal is to acquire a quality piece of real estate that meets at least our needs, hopefully fulfills our 'wants' as well, and gains value steadily over time. In most cases, the real estate purchase is a longer-term investment than the stock purchase, but neither are mutually exclusive in that there's absolutely no reason one cannot trade the stock market AND invest in real estate. Fun stuff! I am always open for your real estate questions and look forward to hearing from you: Angie@RealLifeTrading.com