Retail Home Buyers Need to Think Wholesale for Appreciation
Let’s all agree that it’s been a tough eight years for real estate since the boom times that began to collapse in 2006. Millions lost their homes to foreclosure, more than a million are still underwater, owing more on their mortgages than their homes are worth. Still more are just above water, but not enough to pay the commissions and closing costs to sell their homes.
There’s been a lot of publicity about improving markets, higher home prices, and even bid wars in some areas. However, for the most part those bid wars are in a very tight price range band and the competition there isn’t being felt in most of the rest of the market. Real estate investors have fueled most of the demand over the past few years, and they’re still quite active in buying up deeply discounted properties that end up in rental service.
This mini-bubble of price increases isn’t coming from anywhere near normal demand from first time or resale buyers. It’s been from investors and mostly cash purchases. Armed with this information, the consumer who wants to buy a home but is afraid of seeing its value drop after purchase isn’t necessarily overreacting. I believe that it’s more likely that on average home values will appreciate in the future, but nothing like the boom years.
Conservative estimates place the next ten years’ appreciation at possibly 2 to 3 percent per year in most areas. That average will obviously be exceeded in some of the hot markets in California, Arizona, Florida and New York. However, these will be isolated pockets, and if you’re not buying there, it’s not information of great value to you.
Far from sneezing at 3 percent or so appreciation, it’s at least a rising of value, and if a home buyer intends to stay in the home for 8 to 10 years, they should get their investment back with interest. However, there is a way to increase your ROI (Return On Investment) by changing your perspective and goals when you’re buying. We’re a consumer driven economy, and the real estate industry responds to consumer wishes like any other business. If the consumer wants granite countertops and all of the newest bells and whistles in a home, then that’s what the market will attempt to provide.
Buyers who want those bells and whistles will be willing and able to pay for them, and that’s great. However, if you’re buying in that mode, then expect little more than that 2 to 3 percent appreciation in value over time. If you’re willing to “buy down,” forgoing the bells & whistles, maybe installing them yourself, you’ll be buying below that “consumer driven” market pricing.
Think more like a real estate wholesale buyer and you’ll increase your chances at much higher appreciation numbers, perhaps in the double-digits. Pass on the granite countertops and install them later. Buy a smaller home with add-on potential, add a bedroom and bath, and you just created value appreciation. Do a good inspection, but be willing to take on a few repair headaches and you just might be buying below market value from the start.
If you can buy a home with some repair issues and maybe some correctable dysfunctional floor plan problems, you’re poised to do that rehab work over time and profit handsomely. The other important advantage you’ll enjoy is much less competition on the buy side, giving you greater negotiating clout and a discount purchase price opportunity. If you can lock in some appreciation at the closing table, you’re starting the game with an advantage over the retail buyer.
It is OK to want the best from the start, but be ready to pay for it and settle for normal value appreciation in the future. Buy something less than your dream home, lock in a discount below market value at closing, and improve the property and you’ll be one of those homeowners who will skew the selling statistics in the future. Your buy-at-wholesale and sell-at-retail approach will make you very happy down the road.