From the July 2006 issue of Investment Advisor • Subscribe!

July 1, 2006

Unreal Estate

Home and property issues are awash in emotions

For many clients, emotions around home and property aren't gone with the wind. Many of us grew up believing that owning a place of our own would be a sign of success in life. In some families and cultures, owning real estate is the only true mark of a family's wealth. For a fortunate few in this highly mobile nation, family holdings have deep emotional roots. In all these situations, a house is not just a home; it's a magnet for people's hopes, dreams, and disappointments.

With real estate prices having set new records in many areas of the country, clients' attitudes toward real property may lead to emotionally loaded financial questions or disputes that end up in your lap. Here are some ways you might approach helping clients sort out their options.

Q: A married client of mine wants to spend a recently awarded $40,000 bonus on a master bath upgrade, top-of-the-line appliances, and other renovations that he feels will pay for themselves when they sell their home. His wife would rather have the money go into their retirement savings fund. She says the house is fine as it is. How can I help resolve this impasse?

A: The need for these clients to add to their investment portfolio may be perfectly valid. I assume you're clear on their current financial situation and their probable retirement needs. But before you weigh in on whether improving the house or adding to the retirement fund would create more financial security, it's important to find out what's really motivating these folks.

Try to discover more emotional detail about each person's rock-bottom needs and wants. What do they think and feel about the home they live in? What are their hopes and dreams about home, hearth, and financial security in the future?

People have traditionally viewed their home as a center of family life, and often as an extension of themselves. From that perspective, it has typically been women's role to favor making improvements because they spend more time at home, are more attached to it, and feel more ashamed if it doesn't measure up to their standards. Men, who tend to be less aware of a need for renovation, often prefer to invest their money more conventionally.

Ask your clients if their home is truly in need of a fix-up. In this somewhat unusual role reversal, the husband may be expressing a desire for more up-to-date fixtures and furnishings that he can show off to friends. Alternately, his support for an upgrade may simply confirm that he views his home as a reliably appreciating investment.

Here's my suggestion: Model compassionate listening skills with each client by repeating their desires, validating what makes sense about each one from their perspective, and empathizing with what else they may be feeling. By using this method of slowing down and cooling off the process, you may learn more about why they have such dug-in positions.

Once you assess each client's deep desires and needs in the context of their future financial security, you'll feel better positioned to help resolve their dilemma by advising them on which course of action is best--or suggesting a compromise.

Q: In the fairly hot real-estate market where my business is located, a young couple I work with have done well at buying and "flipping" properties. I've warned them that they may lose everything if the market implodes, but they say they're not ready to get out, that "there's still money to be made." Is there a better argument I can use to reach these risk-taking clients?

A: The combination of these clients' youth and the allure of fast profits may make it difficult for them to imagine a catastrophic loss if the market goes bust.

Ask if they remember the day-trading boom, when it seemed as though everyone was making money on quick trades. But after their trading costs were factored in, they lost money. Of course, the "irrationally exuberant" market eventually went down, too.

It may be worthwhile to explore their respective backgrounds around money. I believe you'll find that either they've never been exposed to loss and can't imagine it, or they have experienced it and are refusing to face the possibility that a similar misfortune could happen to them.

Teaching clients to prepare for the worst is a difficult part of your job. But if you explore this couple's attachment to trading real estate and continue trying to educate them about its risks, you have a better chance of grounding them in a sound long-term financial plan.

Q: My client is one of two cousins who inherited an old Victorian house from their aunt. Before her death, the aunt told them she hoped the house would stay in the family. Neither cousin needs it to live in, and they can only pay for the upkeep with some financial sacrifice. My client wants to sell the house, but her cousin feels they should abide by their aunt's wishes in spite of the hardship. How can my client change her cousin's mind?

A: I think the chances of a mutually agreeable outcome are better if you can bring both cousins together. See if your client can invite her cousin to join her in exploring the matter with you.

If this isn't feasible for some reason, you might suggest that they connect by phone with a trained facilitator to explore their feelings about their aunt's life and her legacy. They can find a family therapist comfortable with money issues to conduct these sessions, or you might volunteer to lead a few of them yourself. You will need to feel comfortable encouraging both cousins to talk about what their aunt meant to them, their feelings about abiding by her wishes, and what it is costing each of them, emotionally and financially, to keep the house in the family.

Suggest to your client and her cousin that their aunt probably wouldn't have wanted them to be financially strapped by the effort needed to keep the house. Together, you may be able to brainstorm other ways to keep her legacy and her memory alive without sacrificing their financial and emotional serenity.

Q: A client of mine insists on having only rental real estate in his portfolio. I've pointed out the benefits of broader asset allocation, but he says his upbringing makes him uncomfortable with stocks or bonds. Is there a tactful way to educate him about this?

A: Your best chance of widening this client's perspective is to explore his family and cultural history around the importance of real estate. Many immigrant cultures in America are very attached to the value of land, and fairly phobic about investing in the less familiar stock market. Try to find out more about what makes him so attached to this one way of building wealth.

Despite your patient exploration and education about the advantages of other choices, he may still feel too uneasy to make a major departure from his family tradition. In this case, simply try to help him make the wisest choices in managing his real estate portfolio. Over time, he may come to trust your judgment enough to try a related investment vehicle-- mortgage-backed bonds, perhaps?

When clients come to you with questions or problems involving their property, try to help them step back and explore their desires, fears, anxieties, and their picture of how life is supposed to be. Once you understand these motivations and know their money history, you can lead them to explore a wider range of options that reflect their values, their integrity, and the realities of their own financial situation and the changing marketplace.

Olivia Mellan, a speaker, coach, and business consultant, is the author with Sherry Christie of The Advisor's Guide to Money Psychology, available through www.investmentadvisor.com. You can e-mail Olivia at om@moneyharmony.com.

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