If you’ve been reading the newspapers or listening to TV news, you’ve heard the songs of woe regarding today’s real estate market. But those songs of woe are mostly for sellers.
Buyers are singing a different tune—because this is the kind of market that comes along once in a lifetime!
Think about the upside for buyers. First, interest rates are historically low—under 4 percent for most buyers. Second, first-time homebuyer programs are still available. In addition to competitive interest rates, some first-time homebuyer programs offer a monthly stipend for a certain period of time; some offer closing cost assistance; and some even offer down payment assistance in the form of no-interest loans that don’t have to be paid back until you sell the home. Third, there’s so much inventory to choose from that sellers—including banks—are negotiating like never before. It’s not uncommon to have a seller significantly reduce the price of the house and pay most of your closing costs.
So there’s really no time like the present if you’re thinking about buying a home!
Sometimes new buyers are so concerned with getting the “best deal” that they neglect to calculate the long-term potential of a property. Smart buyers think about the resale value of a home and the factors that will influence it, including location, sale price, condition and potential for improvements.
Location, location, location
There is a good reason why real estate agents stress location when counseling buyers—property does not appreciate equally in all neighborhoods. You can see the amount of appreciation in a particular neighborhood by calculating price increases from year-to-year. But you don’t have to do the math yourself. Your agent should have appreciation statistics, prepared by national and regional real estate associations, for most of the neighborhoods in your city. These stats are not necessarily predictions for the future, but they can give you a good idea of the range of home values throughout a city, and can help you choose good investment areas.
Good investment areas share certain characteristics. Access to good schools, shopping, lakes, parks and urban centers all help maintain or increase home values in a neighborhood. Demographic trends may also indicate potential investment areas. The ageing of the population and its effect on housing, for example, indicate the types of homes that will be in high demand in the near future. Housing development in many downtown areas has concentrated on condos and lofts that appeal to both first-time buyers and retirees—two groups that will continue to affect housing styles and investments.
A popular saying in real estate is: You make your profit when you buy a home, not when you sell it. While no one can guarantee that a particular property will appreciate, or by how much, any property is more likely to increase in value over the short term if you can purchase it at a “good price”—that is, at or below market value.
When you find a home that interests you, your agent will check the Multiple Listing Service (MLS) to find properties in the same area that have sold within the past six months. By comparing the characteristics of these “sold” properties with those of the current “active” property, you can decide if the asking price of the house is above, below or at market value.
But buyers beware: it is very important to determine whether the current market favors buyers or sellers. In a strong seller’s market, buyers tend to bid over the asking price, and if you pay too much for a house it may be many years before you will realize any substantial return on your investment. Conversely, in a buyer’s market, homes may sit on the market for several months, giving buyers more leverage to negotiate lower prices.
The home’s condition will be a major factor in determining its current and future value. Look carefully at the floors, windows and roof. If the floors are wood, do they need refinishing? If carpeted, is the carpet new or worn? Are the windows chipped or cracked? Do they fit snugly in their frames? Do they need reglazing? What is the age and condition of the roof? Have there been problems with leaks?
Check for water damage on ceilings, walls and floors—especially in the basement and attic. And while you’re in the basement, note the age and condition of the furnace and water heater, the capacity of the electrical service, and whether the water pipes have been updated to copper or plastic. If the water pressure in the upstairs rooms is low, perhaps the pipes need replacing.
Note any improvements that have been made, and the quality of the materials and workmanship. Some investors who buy “fixer-uppers” do a sloppy job rehabbing them, and then try to resell them at full market value. Don’t be fooled into paying top dollar for poor quality.
Read the seller’s disclosure and city inspection reports. Minnesota law states that “Sellers of residential property, with limited exceptions…are obligated to disclose to prospective Buyers all material facts of which Seller is aware that could adversely and significantly affect an ordinary Buyer’s use or enjoyment of the property or any intended use of the property of which Seller is aware.”
Many Minnesota cities also require the seller to have a “truth-in-sale” inspection, and the report must be available for prospective buyers.
In general, note if the home has been well-cared for. If not, and the estimated cost of repairs and replacements would exceed the market value, maybe you should keep looking. But, if you love the house despite its warts, you can either ask the seller to make some repairs, or negotiate a lower price.
While most first-time buyers don’t want a “fixer-upper,” buying a home that is in good condition but is not 100 percent perfect can be a great investment opportunity. Some of the best ways to do this involve expansion space. An attic or basement that can be renovated and turned into a bedroom, den, family room or office can increase the value of the home. Updating the kitchen and bathroom, or adding another bathroom will also increase value. However, be careful not to spend more on improvements than the neighborhood home values can bear. Every location has its limits, and you don’t necessarily want to be the most expensive home in the ‘hood—you’ll probably never recoup your investment.
Your first home may not be the ultimate home of your dreams, but if you treat it as a wise investment, it can put you on the path to affording that dream home.
Janet Contursi has been a Twin Cities Realtor® for more than 10 years. She is expert in all types of residential real estate, including short sales and foreclosures, and she especially enjoys working with first-time buyers and sellers. Contact her at (612-655-1207) or: email@example.com