I was recently asked to answer a few questions for an on-line reporter. She wanted tips on how to purchase properties for half their market value. Here was my response. To the best of my knowledge, she didn’t use it.
Acknowledging this will be an unpopular answer, my advice is to stop wasting your time.
It is incredibly rare for an individual to purchase a house at half its market value. You may be able to purchase a run-down home for half what it would be worth if it were in good condition, but you will have to add a lot of dough after your purchase to get the home back to its former glory.
At the risk of sounding like a typical real estate broker who simply wants people to pay as much as possible, my opinion is a “buy a house at half its market value” article is a real disservice to consumers. It leads them to believe that its common place and that they shouldn’t have any problem finding and purchasing several. Both are false.
Don’t get me wrong. There are still exceptional values out there, but they aren’t selling at half their market value. They’re selling at their neglected, been-vacant-for-ages value. For example, there are still many opportunities to pick up bank-owned properties which typically sell for about 10-20% less than their market value. However, there’s a reason those homes sell for less. First, the previous owner, who was unable to make his mortgage payment, didn’t have money to spend on basic maintenance tasks. So, the house has gone months, perhaps years, without replacement of worn items. Second, most banks require buyers to sign lengthy addenda that restrict the inspection period to 5-10 days and waive any responsibility if the house turns out to be a lemon. Third, those homes showing obvious signs of neglect may have problems that will disqualify the house for financing (i.e wood rot, inoperable HVAC, missing stove, etc.), meaning the pool of buyers is restricted to those who can pay cash.
Short sale properties may sell at a similar 10-20% discount and have many of the same issues. In addition, the buyer can expect to wait two to four months for the seller’s lender to approve the sale. Of course, after waiting all that time for an approval, the buyer may be surprised to learn the lender won’t accept the terms of the contract.
Sadly, while unrealistic buyers are chasing the nearly non-existent “half-price deals” touted in an article such as this, their buying power is rapidly diminishing. As one of my competitors, Intracoastal Realty, succinctly sums up in the below graph, we have barely left behind the lowest prices and lowest interest rates created by the recent recession. Yet, the modest increases we’ve experienced to date have caused the average mortgage payment to increase by a whopping 28%. Wait another twelve months and, if home prices increase another 5% and the interest rate increases another 1/2%, the average mortgage rate will go up ANOTHER 11%. That means the monthly mortgage payment has already soared from $675 last year to $865 this year and is projected to reach $963 next year. Now, there’s a story.
