Learn from recent history or pay the price
Originally appeared in Bay Area News Group publications on August 14, 2009
“We learn from history that we learn nothing from history.”
– George Bernard Shaw.
After 30 years in real estate, I have witnessed this wisdom, especially in how home buyers function.
Today’s market is a great opportunity for some to find tremendous values and to finance them with near-record low interest rates. It is also a time when others are repeating mistakes made by buyers in the not-so-long-ago seller’s market. Purchasers need to learn quickly or risk years of regret and potentially significant financial losses.
Numbers provide insight
Although we are in a buyer’s market, the range of single family homes between $500,000 and $750,000 in five popular Oakland zip codes almost feels, to some, like it is a seller’s market.
In the above price range, when comparing July 2008 to July 2009: pending sales (currently in escrow, but not yet closed) are up 30%; number of properties for sale is down 17 per cent, number of properties sold is up 13 per cent; new listings are down seven per cent; months supply of inventory, at 1.9, is down 42 per cent. This exceptionally low inventory has lead to frequent cases of multiple offers, although the median price, down two per cent, is about the same.
Fewer than two months of inventory is one of the qualifications for a seller’s market. Confusing as it may sound, we have what may seem like a seller’s market in the midst of what clearly continues to be a buyer’s market. Don’t be fooled.
Ask yourself, how reasonable is it to get into a bidding war during a down market for sellers? In some, unique scenarios where it is the home of your dreams that you know you will live in for a long time, this might reflect sound judgment. On the other hand, for many properties, it may not pass the common sense test.
Determining value
Some variables that go into value:
Location
– is always number one. Keep in mind there are detrimental factors that can seriously diminish value, even in a highly desirable location. An example is a heavily trafficked street.
I know someone who owns a really nice house in an excellent neighborhood, but on a very busy street. In addition, it is directly across from a school that has enormous activity.
Bought during peak of the seller’s market, the selling agent was a personal friend from out of the area. She did not know the drawbacks of this particular location, nor did the buyer.
Now he understands and would not have bought this house and, certainly, not for what he paid. This is one of numerous faux pas buyers have made in the past and continue to make.
Condition
– A car with a gorgeous body and a terrible engine will not get you far. The same is true for a house with expensive foundation, drainage or pest control problems. Other potentially costly items are sewer line and roof.
Make sure you do not allow competition to stop you from having complete inspections by competent inspectors. Get written bids. Don’t forget, until you close escrow, the seller owns the house and all its problems. Standard, Realtor® contracts say you are buying “As is,” unless you specify otherwise in writing.
Be certain you understand what you are buying. Carefully read all reports and disclosures. Ask questions of your inspectors and the seller. Take nothing for granted.
Lack of permits
– It is truly astonishing how many buyers give short shrift to the absence of permits. This oversight could not only compromise your price when you sell, it could result in harm or death to you and your family, particularly if electrical and/or gas line alterations were made without permits. Look not only for the existence of permits, but also that they were finalized.
Also important is major remodeling done without permits: a kitchen or bath redo, an addition to the house or a significant rearrangement of walls and framing. No matter how pretty it looks, buying with these issues is a risky proposition. In the game of musical chairs, will you be the one left standing?
Too many steps
– I showed a house last week that had almost 100 steps. Once up there, the view was sensational. As a place to live, navigating this climb on a daily basis is not a pleasant prospect. Even with fewer steps, if you think the climb is too much, so will others when it is time to sell.
Price per square foot (ppsf)
– At the peak of the last seller’s market, some homes sold for over $700 per square foot. Considering they could have been rebuilt as brand new and fabulous for less than half that amount, I wondered what these buyers were thinking. Today, as they come on the market, they are selling for well under those figures.
There is an inverse relationship between size of the property and its cost on a square foot basis: the smaller the house, the higher the ppsf. Knowing ppsf can give you perspective. This is available on the Multiple Listing Service information sheet.
Final Thoughts
You don’t want to make a serious mistake in the house you choose and how much you pay for it. Many buyers are so busy with their jobs, kids and all the stresses of everyday living that they just don’t seem to have the time or energy to fully focus on the details of buying a house.
Home buying requires responsibility on your part. Paying attention now may save you tens of thousands of dollars and loads of aggravation later.
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