Real Estate Expert: Key Things to Weigh Before Buying or Selling a Home

Before you decide whether to buy or sell a home, it is important to think about the risk of negative equity and what it could mean for you. Right now, that risk exists on both sides of the transaction.

Recent Realtor.com data showed that home prices fell in 36 of the top 50 metros in August, pressured by higher mortgage rates and changing local market conditions. The steepest price-per-square-foot declines were seen in Austin, Texas (-8.1%), Tampa, Florida (-5.6%), and Memphis, Tennessee (-4.1%). Experts said those price drops may be welcome news for buyers who had been waiting because homes felt too expensive.

MoneyLion asked real estate experts how buyers and sellers can limit the chances of ending up in negative equity. They offered five suggestions.

1. Don’t Make a Fast Decision

“One thing buyers often misunderstand about negative equity is that it doesn't necessarily become a problem the moment a home's value falls below the mortgage balance,” said Jim Gruler, a licensed real estate broker and cofounder of Seeking Agents. “The real danger is having negative equity at the same time life forces you to move.”

Whether you are buying or selling, it is risky to move ahead too quickly in real estate. Transaction costs and a possible loss of equity can make the deal a poor financial choice. Gruler also said buyers should not treat the maximum mortgage approval amount as the same thing as a homebuying budget. Instead, they should look at comparable sales, available inventory and the property's condition before deciding what they can comfortably pay.

2. Don’t Count on Prices Rising Forever

“The best way to avoid negative equity is to buy a home not based on the idea that prices will always go up,” said Matt Brown, a real estate agent at Matt Brown Real Estate. “Buyers should consider affordability of the property, true market value of the property, and long-term financial picture when buying rather than just purchasing at their maximum amount approved by the lender.”

If you stretch yourself too far, you leave yourself exposed to market swings, which can become a problem if you need to sell at a loss. Buying above comparable market values because you expect prices to keep climbing also leaves you with little or no equity cushion if the market weakens.

3. Be Careful If You Expect to Move Soon

Gruler said buyers can lower the risk of negative equity by being cautious about making a purchase with a very small down payment when they expect to move again within a few years. Because real estate transactions are expensive, a home purchase makes the most sense when you plan to stay long enough to absorb those costs, ideally for at least five years.

If you sell at a loss, you will have less money to put toward your next home. In some cases, renting for a while may be a better option than taking on debt and the risk of ending up underwater on a mortgage.

4. Put More Money Down

A larger down payment creates more equity right away and reduces how much the buyer owes, which can help cushion the impact of market changes. As with any major purchase, it is best not to rush into buying a property until you are ready for the financial commitment.

Brown added, “While negative equity can't be eliminated due to market fluctuations, conservative financing methods, realistic pricing, and sufficient financial reserves can minimize risk significantly.”

5. Estimate Your Net Proceeds Before You List

If you are selling, it helps to calculate your likely net proceeds before putting the home on the market. Gruler recommends finding out the mortgage payoff amount and estimating selling costs ahead of time. If the numbers do not work at a realistic market price, it is better to know that before you accept an offer. Repairs, real estate commissions, potential taxes and other costs should all be included in the calculation.

Gruler concluded, “If a homeowner can comfortably afford the payments and doesn't need to sell, a temporary decline in value may have very little practical impact.”