By Kevin M
Are you really getting a deal on a home because you can get it for less than it would have cost three or four years ago?
Maybe. And maybe not.
In most markets, house prices have come down 20, 25, 30% or even more from their 2006-2007 peaks, and that?s caused many to believe they?re getting a deal by buying now. After all, they?re able to buy a home at discount compared to what they?d have gotten if they?d bought at the peak.
At some level, this reasoning is sound. After all, a lower price translates to a lower down payment and a lower monthly payment. And by waiting, you managed to miss the equity plunge that landed so many homeowners in deep trouble and even foreclosure. So far so good.
But is it really a deal?
Just because you?re paying less doesn?t mean a home is a deal
Paying less for a home than you would have a few years ago, certainly has advantages, but it doesn?t mean that what you?re getting is any kind of a bargain. If the price you?re paying for a home is consistent with price levels in the surrounding neighborhood in general, then what you?re getting is merely the market price.
That?s the price of a home that anyone would pay for a similar one in the same neighborhood, but it doesn?t represent a bargain in any sense.
The real determination of whether a house is a deal depends entirely on how the price compares to the current market, not the market of three or four years ago. If we use 2006 market prices as a barometer, then everyone who buys a house today is getting a ?deal? because nearly the entire housing market is discounted compared to where it was then.
Getting a Real Deal on a home
In order to get a real deal, you have to measure the price you?re paying for the home versus the current prevailing market. The price that would have been paid a few years ago is now ancient history and no longer relevant.
Simply put, in order to get a true deal, you have buy at a price that?s substantially below today?s market.
With the number of foreclosures, short sales and other distressed properties available on the market, that shouldn?t be too hard. Sadly, many people looking to buy a home pass on these because there may be complications in the sale or there may be some work required after closing. But those are mostly inconveniences, which are not only temporary, but also represent a small price to pay if it will enable you to save $20,000, $30,000, $40,000 or more on a $200,000 property.
If you?re well qualified to buy in a given price range, then you?re in the driver?s seat in this market. It is after all, a buyers market, and you?re a hot commodity!
Here are some steps to identify and bid on homes at a discount:
- Zero in on the neighborhoods you want to buy in, keeping in mind that it?s the neighborhood you?re buying more than a house
- Monitor recent (within six months) closed sales of similar properties in the neighborhoods; this is the only legitimate way to establish market value
- Ignore opinions of neighbors or real estate agents as to property values, as both may have a vested interest in higher prices
- Remember that old sales (again, over six months) are not valid market indicators in a market that?s in a state of flux; the more recent the sales, the better
- Identify distressed properties?foreclosures, short sales, and homes that have been sitting on the market more than six months?these are the properties where you?re likely to get the deepest discounts
- If a property interests you, offer well below what ever it is they?re asking, even if it?s already below market, and be prepared to wait it out; an offer with a 20 or 30 percent discount would not be ridiculous in this market
- Don?t be afraid to insult anyone with a low offer?yours may be the only one they?ve had and could be the answer to their prayers!
Why getting a Real Deal is so important in today?s housing market
The dramatic fall in house prices in the past few years took many by surprise. Even so, don?t fall into the trap of believing that it was a one time event. The fact that prices have fallen so steeply, and so consistently across so many markets means that anything is now possible in the future.
The past few years have opened the reality that real estate is riskier than most imagined it could ever be. The best insulation from those risks going forward is to pay the lowest price possible for any home you buy.
If you are successful at buying a home at a 20% discount compared to today?s market price, you won?t be negatively affected if a spike in mortgage rates or another nasty downturn in the economy cause prices to fall again.
That would represent a real deal on a home, not merely a lower price than you would have paid a few years ago.
Are you looking to buy a home right now? Have you looked at distressed sales? Do you think you can find properties that are deeply discounted based on today?s price levels?
I couldn’t agree more. I am sure many people bought a ‘deal’ a year ago, and find it is now worth 8 percent (or whatever) less than when they bought it. The market is nearly impossible to time. Not to mention different pockets of the country are in differing amounts of financial distress than others.
If I had a bunch of extra money lying around, I would consider buying rental property right now, but I have no interest buying a different home for myself. I guess I am just a bit skittish right now because both the stock market and housing market have acted ‘out of character’ in the last 10 years. (Referring specifically to that crazy tech bubble.)
ET – that’s the whole point of buying below current market. It’s the best defense you can have against future price declines. I’m not predicting even lower prices, but it has to be acknowledged that it’s possible.
Good points on home values. We recently bought a home on short sale and definitely bought it at a substantial discount. One word of advice if you’re going down that road, get a realtor who’s bought and sold many short sales so they know how to navigate the process. Saved us a ton of money.
Ben – It’s not the easiest way to buy a home, but with so much inventory out there, and so much of it distressed, it’s worth the hassle for the money you can save. Since housing is typically mortgaged, it’s an expense we pay again and again for years. Saving on the purchase means saving for decades.
Good point on using a knowledgable r.e. agent. The can smooth the process, and set the right expectation from the start.
Thank you for the helpful tips in buying a home. I have not yet purchased a home, but I do recognize that it is important to have the right perspective when considering the ‘true cost’ of what I will be purchasing.