On one hand, helping clients purchase homes may seem counterproductive. After all, clients may need to liquidate a portion of their investment accounts to produce down payments. In the long run, however, assisting individuals with the process can help strengthen client relationships and ward off competition from other advisors who are willing to help investors with issues related to buying homes. Either way, advisors should expect their clients to become increasingly interested in purchasing first homes or buying larger residences.
In the aftermath of the 2007 subprime mortgage crisis, economic fears have caused many Americans living with relatives or friends to hold off on moving into their own residences, or creating their own households. Some real estate analysts estimate that the trend has created a pipeline of some potential 2 million new households.
As the economy improves, individuals and couples are increasingly expected to start their own households. Some will rent apartments but many will become homeowners. Low real estate prices and historically low mortgage rates have made home ownership highly affordable. Tough mortgage standards, meanwhile, have made securing financing difficult, so many Americans are now renting apartments, which has caused rental rates to surge in many markets. The high rates are enhancing the financial appeal of homeownership compared to renting.
With that in mind, advisors should ask their clients during routine meetings or conversations if they are considering purchasing homes. Advisors may want to ask clients living in apartments if they would like help with comparing the financial consequences of renting and homeownership. Generally speaking, such evaluations entail comparing rental rates to homeownership expenses, such as mortgage payments, insurance premiums and property taxes. The tax benefits of mortgages, which entail deducting interest payments, should also be evaluated as well as one of the major drawbacks of homeownership, which is the cost of maintaining a house. Potential homeowners should also assess the possibility of real estate values increasing or decreasing over the long haul as well as the outlook for changes in apartment rent.
When clients express interest in buying homes, advisors should be prepared to help assess credit ratings, prepare budgets that reflect mortgage payments, and create accounts with liquid assets for use as down payments. Assessing credit ratings and addressing any credit issues are important first steps, as a bad credit history can make it hard for clients to qualify for mortgages. While complex issues may require specialized credit counselors, there are many things that advisors can do to help clients manage their credit ratings. (See article “Credit Counseling Can Boost the Advisor-Client Relationship”).
Creating an account with liquid assets for use as a down payment may entail liquidating longer-term assets, such as equities, which may trigger capital gains taxes. When determining which assets should be liquidated, therefore, advisors should assess the different tax implications that could result from selling off portions of a portfolio. In a worst case scenario, some clients may propose making premature withdrawals from their 401(k) plans. In such instances, advisors can provide valuable assistance by explaining that premature withdraw penalties may apply.
From a budget perspective, clients may need to modify their spending levels if anticipated mortgage payments and property taxes will change their living expenses. At the same time, clients may need to tweak their budgets to save money for future home repairs and increase their emerging funds to reflect how homeownership may have changed their living expenses.