In real estate, the basic concept is to buy the lowest priced house in the best possible neighborhood. This is called the “principle of progression” and it is the soundest way to protect your investment.
As we continue to experience an improving (some would say sizzling seller’s market), this paradigm has been increasingly turned on its head. Despite record low interest rates and a choppy stock market, buyers currently out number homes for sale. In our area, it is the best time in perhaps eight plus years to be a seller and it’s becoming increasingly difficult to be a buyer.
Today, we are in uncharted territory. As a buyer, not understanding the implications of current conditions could cost you.
The frenzy of multiple offers
Local home prices are now starting to rise, particularly in the past seven to eight months. Even secondary areas are commanding attention. Last spring, I was surprised to hear of an agent who received more than 9 offers on a “fixer” in a less popular part of town.
Within the recent past, I know of a $150,000, two-bedroom condo that received several offers and a $399,000, three-bedroom home in a desirable location that had 5. When demand far outstrips supply, this is the result.
Both buyers and their agents are frustrated, tired of writing contracts in competition and not getting their offer accepted. There are many buyers in the market who have failed to consummate a sale after 6 or more attempts.
Out of panic, disgust or desperation, some buyers are determined not to lose again. Before you race to beat the crowd and end your house-hunting ordeal, it is essential to see the big picture.
Know the comps
Be familiar with recent comparable sales, especially the highest ones in the neighborhood. Unless money is no object, it is preferable not to be the one who establishes the new high price for the area.
Comparing the top prices paid in various neighborhoods will give you and your client a sense of their relative desirability. The most expensive locations, even if you can qualify, may not necessarily be the only ones for you. Experience and knowledge of the current inventory is vital. Expertise is invaluable in helping Buyers make this determination and in explaining the nuances of property valuation.
The maximum price paid in one Southwest Minneapolis neighborhood recently exceeded the previous high by 11 percent. This was 12 percent higher than the asking price. Subsequent nearby listings quickly factored in the record sale and sold much higher. Having this kind of information is critical in deciding how much to offer, particularly in competition.
Avoid a big mistake
Buying below the summit for the neighborhood may mean it was a reasonably good value for this market. Conversely, it could be a major, expensive blunder. It all depends on the exact location, size, style, and condition of the home.
For example, if the most expensive house is unusual or architecturally significant, this could add substantial value. Perhaps it has a fabulous lake view or incredible, park-like grounds. It might be a charming traditional that was remodeled with exceptional quality.
On the other hand, the home you are is considering may be pleasant and spacious, but tired, and with no especially redeeming qualities. In this scenario, you could end up paying less than, but close to, the amount of the special house. If so, you will have paid a premium for a property that is not really comparable.
Even in the latter case, as long as prices keep moving up, a Buyer could come out all right. Nevertheless, when the market starts falling, that particular home might be worth a lot less than the special house. Remember, the most interesting, attractive homes in the best condition and location always sell for a premium, given the market at the time. In comparison, all others sell for substantially less.
We do not know when, but there is no doubt that once we have passed the peak, prices will level and, eventually, fall. Hey…We just went through an entire downturn. Previous high home prices may never return, but current low prices may not either. Bear in mind in discussions with your people, “that it is easier to buy the most expensive house on the block in a rising market than it is to sell for the same amount or more in a declining market.”
Working with customers and being a buyer in a molten market is a challenge. You need patience and perspective. Most importantly, make sure to imagine being a future seller before buying.
Thanks for allowing me to rant…