The Investment Side of Home Buying
Now that buyers are moving about every 4 to 5 years, the investment side of home ownership has taken on more importance. In the past, homeowners lived in a home much longer and weren’t so concerned about short-term ups and downs in the housing market.
But, now, it seems homeowners are very concerned about appreciation and return on investment, creating wealth in real estate with profitable upward moves.
As long as homebuyers have realistic expectations, this is not a bad strategy – if you don’t mind moving every five years. What I have seen in the last year or so, though, is unrealistic expectations caused by myriad investment strategies propagated by books and cable programs and misinformation about buying and selling real estate.
In a relatively strong market like Savannah, trying to buy homes for 20% to 30% below market value is a futile strategy. You may find a home you can buy for 20% below asking price, but that is not the same. If a home is overpriced by 20% and you get it at 20% below asking price, you are paying the market value. Market value is determined by what has sold recently that is comparable to the home you are considering. In good markets, the strategy to buy should be to not OVER pay for a home, and hope maybe to get it at 2-5% below market value if the market has slowed a bit.
In a good market the homebuyer will make their money off the appreciation over five years or so rather than making it on buying homes way below market value. Even if you find a home 20% below market value, there is probably a good reason for it. Usually it needs a lot of repairs. Now this is great if you are handy and can do the repairs yourself and don’t run into any major surprises. But, if you have to hire a contractor to do the repairs, you may be defeating the purpose of trying to make money on the buying side. There again, though, the market value rules, and if the home is in bad condition and is priced at the market value of similar homes in better condition, then you are spinning your wheels if you get it low than have to put it all back in for repairs.
Perhaps every once in a while a buyer in a good market will find a distressed seller who will take 20% below market value, but it is not often, and you have to be careful that the reduction is not based in reasons other than the seller’s distress. Why hasn’t the seller been able to sell it at market value? If it is mortgage problems, most banks will work with the seller long enough for them to sell the home at market value.
Don’t be fooled into wasting time and effort trying to get homes for way below market value just because the media says it is a buyer’s market and that prices are falling. Real estate is local, and depending on where you are buying, the market may be strong or weak. If you are buying in a area of the country where home prices are falling sharply, then buying at 20% below market value may not be profitable in five years if the area doesn’t rebound and actually falls another 25%.
So, if the investment side of home buying is important to you, get good information before setting unrealistic expectations. You may miss the best investment by chasing the impossible investment.