Paying cash for a home can be a great way to get a better deal. Sellers often prefer cash offers because they’re less likely to fall through. You might even get a discount on the price or have your offer chosen over others that involve a mortgage.
But what if you don’t have the cash on hand? One option is to make an offer without a financing contingency. This means you’re promising that you have the funds available, whether from a bank or a wealthy relative. If you can’t get the financing and back out of the deal, the seller keeps your earnest money deposit.
Another way to pay cash for a house is by selling stocks. This is a common method, as most people don’t have a large amount of cash just lying around. I’ve done this twice before and will likely do it again in the future.
So, why do I invest in stocks? There are three main reasons. First, for my retirement. I max out my contributions to my tax-advantaged accounts each year. Second, to pay for my children’s college education. I contribute the maximum gift tax limit amount to their 529 plans each year. If there’s money left over after college, it’ll be rolled into a Roth IRA for their retirement. Finally, to buy a home. The cost of a home is so high that I need to save and invest for years to come up with the down payment.
I see stocks as "funny money". They don’t have any utility in themselves, so it’s important to occasionally convert some of your stock gains into real assets or experiences. I’ve made and lost money in stocks since 1995, but I’ve learned that once I’ve made enough to buy what I want, I sell. I’m okay with potentially making less in the future because I’ll always still hold some stocks.
In 2022, my public stock holdings declined by about 25%, worse than the S&P 500’s decline of 19.6% due to my overweight technology holdings. I regretted not selling more stocks in early 2022 given what a bonanza year 2021 was.
In May 2022, I found a dream home that was about 20% out of my price range, so I had to pass. But in April 2023, my public stock holdings had rebounded by over 20% and the home came back on the market at a price 7% less. I was intrigued! But after about a month of deliberation, I felt the price was still too high for us to comfortably afford, so I passed again.
Two months later, the agent contacted me and said the seller would be taking the home off the market. I made a lowball offer 7.5% below their new asking price, which was already 7% less than last year’s asking price. The seller refused.
About three weeks later, I decided to write a real estate love letter to explain where I was coming from and make a connection. I convinced the listing agent to be a dual agent and represent me, saving the seller a 2.5% commission. The seller ultimately accepted my offer with a begrudging but kind letter to me. After accepting my offer in July 2023, I began selling more stocks in order to pay cash for the house.
Selling stocks to buy a house has tax implications. It creates a taxable event, so one of the biggest challenges is selling enough stock to buy a house without having a huge capital gains tax bill. To minimize your capital gains tax, you need to conduct tax-loss harvesting where you sell your losers to match your winners.
Deciding which stocks to sell can be hard. You might get attached to a stock, especially if it’s been winning for a long time. To sell these stocks, you must convince yourself that these stocks are overvalued. If you feel the stocks are undervalued, then you will find it difficult to sell them.
You might feel good after selling stocks if they go down soon after. But this happiness may be misguided because a decline in the stock market may portend lower corporate profits, slower GDP growth, and lower demand for housing, which would be bad for your new house purchase.
On the other hand, if you hold the S&P 500 index long enough, you will eventually make money. Hence, selling the S&P 500 will eventually start to feel bad after a long enough time passes.
After you sell stocks to pay all cash for your home, your net worth composition will have a greater percentage in real estate. Therefore, your main goal, if you want to feel better, is to aggressively save and invest more in stocks to return to your old net worth composition.
Investing FOMO increases when stocks are going up and you have less exposure. That said, you still want stocks to go up as much as possible because it bodes well for your real estate holdings.
After reading this, I hope you appreciate how much psychology is involved in investing. The first hurdle to overcome is the fear of financial loss. The next hurdle to overcome is the fear of not making as much as you could! But this second hurdle is really a luxury given you should already feel better owning and living in a nice new home.
Remember, the reason why you sold stocks was to have a better lifestyle in a nicer home. If you never sell stocks, then you never capitalize on the reasons why you invest. Even though you sold stocks to buy a home, you absolutely want stocks to keep on going up after you sell. A rising stock market brings more wealth, increases demand for real estate, and boosts the value of your remaining stock holdings as well.
