BE SURE TO GAUGE RISK TOLERANCE AS PART OF ANY REAL ESTATE DEAL
On behalf of Michael Brooks of Law Offices of Michael A. Brooks on Saturday, June 16, 2018.
True story: there once was an editor for a major news wire who, in trying to meet the constant demand for fresh news, informed the boss he was feeling overwhelmed. The boss’s response was, “I have every confidence your threshold for dealing with it will rise.” The editor survived but left the industry. The risks outweighed the rewards.
Nearly every venture we undertake involves a risk-reward trade off. This is certainly true for transactions involving the purchase or sale of real property. Whether a deal delivers what all that parties hope for depends on a lot of factors, including structuring deals to balance risk and reward in line with personal risk thresholds.
Gauging risk tolerance
In the context of residential property buying, you need to be aware of the many elements that could throw a wrench into your dream works. Consulting with an attorney experienced in identifying and addressing variables can give you confidence that you can deal with whatever happens. Experts generally agree the process starts with knowing what you can afford. This is done by getting a handle on four factors:
- Your current income: In California, property prices run high. How much do you make and how much of that income will go to paying the mortgage? If you are a high-income earner, you will have more leeway to be aggressive in your borrowing.
- Your income stability: This involves looking at the nature of your income. If you are salaried and receive no other compensation, your risk tolerance would likely be low to moderate. Individuals who make bonuses, commissions or receive stock options, might be able to tolerate greater risk. If you’re self-employed, many advisers urge maintaining a low-risk attitude.
- Saving habits: From lenders’ perspectives, the greater your saving history the more confidence they have in your ability to accept greater debt risk, making them willing to stretch normal debt percentages. The more important perspective is yours and whether you want to take on that risk.
- Your age: Youth has its advantages. If you anticipate solid career growth for years, you might be able to handle more risk and be more aggressive on borrowing. If you’re nearing retirement, your debt capability depends on post-retirement income which is typically lower and growing only minimally. Planners suggest keeping risk low.
One way to sum it up might be to say, buyer, know thyself.