When is a Home Purchase Considered a Smart Investment?

When is a Home Purchase Considered a Smart Investment?

Anyone that owns a house knows that they can often be money pits. Some people consider a home as an expense, rather than an investment. I think that either case can be true, but it depends greatly on HOW you purchase the home. When people are searching for a home to live in, they often will choose a property based on emotion. People envision a home as a place to raise their kids or grow old, and make a decision that isn’t best for them financially. In this case, it is easy for a buyer to in over their head and come under serious financial strain.

Here are some ways you can get a home for a price that will allow breathing room:

When you are searching for a home, your biggest consideration should be the price of “comps” in the surrounding neighborhood. Comps are homes with similar characteristics as your own that have recently sold. These can help you see what your home is worth and how much you would be able to get in case you had to sell. It is also important to see home much available inventory is in the surrounding area. The more homes that are for sale in the surrounding area, the less likely it is going to sell. Lots of inventory makes your home worth less. You should also check what the prices are in your area compared to other surrounding areas. If you are looking at a property in special area like the beach, it may maintain its value better.

Distressed Properties

The economy is still rocky and alot of people are really hurting. This is a time when alot of people have defaulted on their home loans, had their formerly good credit scores completely destroyed, and struggle to pay their bills. What is bad for them, can be good for you financially. Bank-Owned Properties (or REO’s) are properties that have been repossessed by the bank due to non-payment by the previous owner. At the height of the mortgage crisis in 2008, there were a flood of these kind of homes that hit the market. This incredibly difficult time for many homeowners, was a boon to many investors. At this time many homes were selling at 3/4 of their normal values, so a wise purchase of a distressed property at this time has allowed the networth of many investors to increase significantly.

REO prices can be very good, but it is not easy to deal with banks on these type of real estate deals. They will always have the upper-hand due to the fact that they are a huge company with many of these deals to get done. They will often have you sign contracts that put them in total control of the situation. It can be difficult, but it is a game worth playing as you can often get amazing deals.

The trick to finding the right distressed property is to not be overly anxious. Many times you will find the perfect home and have it slip through your fingers very quickly. Try choosing a general area that you like and wait for a property that fits your criteria to become available. If the inside of the home isn’t what you like, don’t worry because it can be transformed fairly cheaply with new paint, carpet, and fixtures.

If you wait for the right deal, you may even be able to find a home that can make you money. A friend of mine purchased a bank-owned property in 2008, and two years later sold it for $100,000 more than he bought it for. This was a great deal that he was able to make because he 1) knew the prices of homes in the area 2) was willing to wait for a house at the right price and 3) waited for the economy to improve so he could sell at the right price.

There are also other types of distressed properties that you should also look into including short sales, auctions, and pre-foreclosures.

Down Payments

Making a good sized down payment is also important for being able to weather any changes of income or tough times. If you cannot afford a 20%-40% down payment, you should not purchase the property. Like in corporate finance, “cash is king” when it comes to real estate. Buyers that have the ability to do “all cash” deals often get priority when it comes to bank owned properties. Banks would much rather go with a buyer that has the ability to buy the property “all cash” in 30 days, than wait to see if a potential buyer can even qualify for the loan. Pre-qualifying for a loan is something that you can do to improve your odds when competing against other buyers.

The Right Home At The Right Price

Buying ANY home at a bad price is the wrong move. It doesn’t matter if this house fits you or your lifestyle perfectly, you should wait for something that is below market price, and has a motivated seller. This way when you take one of the biggest financial steps of your life in purchasing a home, you will be able to handle any problems that arise.

About The Author:
Ross is a real estate investor and manages a website that focuses on all thing personal finance including real estate, credit, debt, and investing.

9 Responses to When is a Home Purchase Considered a Smart Investment?

  1. I’m looking for a fixer upper for my first home. Seems like a great time to buy, plus I’m pretty hand when it comes to fixing things. Crossing my fingers it will be worth more than what I paid / put into it when I sell it. Unless I never sell, in which case it will be perfect!

  2. I wish I could buy a home right now, but moving in the near future is too big of a possibility. I will be looking to purchase in a few years and will do everything possible to put down a huge down payment.

    • I agree! It is all about the neighborhood. i don’t think people consider the community, amenities and schooling when making a home purchase. All very critical issues.

  3. All good tips! They say you shouldn’t buy a home until your job situation is fairly secure and you plan to stay there for a long time. Get the real estate records on a home to see what the price history on it has been. How about buying a duplex at distressed prices, living on one side while renting out the other? No driving time to fix the rental & you can make sure your renters are treating their half well.

  4. Don’t pay off your home…at least the conventional way through an amortized loan. You could be risking your wealth.

    Equity is dormant. It doesn’t earn interest, it’s unsafe, and illiquid. Banks want you to pay off your home faster through things like a 15 yr mortgage. They want the cash flow.

    Keep the equity separate. Use an interest only loan. Stop sending extra payments.

    Next time your talk to your lender, ask them this, “If I’ve paid 15 years ahead on my mortgage, would you let the next 2 months slide?”

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