Note; This is the next post in my series the ABCs of buying, selling and investing in real estate where I pick a letter and then answer a fictional question from a fictional person in a fictional scenario. You can think of it as the Dear Abbey of Real Estate except I have made up everything (except the advice I give).
Harry was a young guy with his first real job out of college. He was working as an accountant for one of the big firms. He had been there for about a year and had a good wad of cash saved up. He decided it would be a better investment to put his savings into his first house where he could realize some possible appreciation of the investment. He was brand new to the real estate game, however, and when he called me one afternoon, he had one question in mind. What would be a bad investment when it comes to a home where I will live for the next five years.
Here is what I told Harry.
Be careful! This warning was out of my mouth as soon as he asked the question. We are in a seller’s market and with the high level of competition and low inventory, you can quickly find yourself considering properties you might not otherwise think about buying. Our inventory is low for a healthy market. Normally, we like to see a six months inventory. In other words, if no more homes were put on the market today, how long would it take the current available homes to sell out. It has been two months for a couple of years now. People are not selling for a wide variety of reasons and they are enough buyers to create this strange vortex of a market where normal reasonable buyers are sucked into craziness by offering outlandish prices for homes that are obviously overpriced. Recently, I have been reading reports that this will change in either 2017 or 2018 when the cycle changes back to too much supply and very little demand. However, with Harry, he wants to move in sooner versus later. This is fine since he wants to stay in the home at a minimal of five years. The up and downs of the market won’t affect him much until he decides to upgrade his housing. For this first home, Harry will just need to be patient for the right deal to come his way. Whatever he does, I told him he needed to avoid these horrible homes.
1. Structural damaged – “The foundation had repair work done on it and it has a lifetime transferable warranty. ” In Texas, this phrase is seen frequently in listings for homes. I often find myself telling buyers that it is not a matter of if the foundation will shift, but when. Our homes in Texas are built on top of some interesting soil that moves easily in the heat and cold of the Texas climate. Does a home with foundation issues need to be purchased? It depends, but I would caution against it for a first time home buyer. I have seen homes that are practically split in half where the crack in the ceiling looked like someone took a large knife and cut the house in the middle. With this type of severe damage, you don’t know what other issues might been caused as a direct result of the foundation. Did the plumbing get moved along with it? How does the drywall look throughout the house? What is the condition of the roof? There are simply too many hidden things that could be wrong with a house with foundation issues. It is best that most homeowners pass on these properties. If you are seasoned investor with an clear understanding of what you about to encounter in repair costs, then it does not matter. Most homeowners don’t have this level of understanding and experience.
2. Overpriced Homes – Back in January, I had been showing homes to some friends for about two months when we thought we found the home for them. It was in a highly desirable area of Fort Worth and the listing agent told me that they had three offers before the noon hour rolled around. She recommended we get in as strong as offer as we could. My buyers had already lost out on three homes to other bids so they decided to bid $10,000 above asking for the home. Two days later, I get an email from the listing agent seeking another higher bid for the home. The sellers thought my buyers could do better. My buyers walked away from it and we found a HUD home the next week that was perfect for them. I tell this story to illustrate that it is very tempting to purchase homes overpriced in this tight seller’s market. In fact, I have been told by many buyers that all homes are overpriced right now in Dallas-Fort Worth. It is difficult for me to argue the point, but there are houses that take advantage of this market more than others. If you gut tells you the house is not worth the list price, it is best to avoid the home and move on to the next one. Even in a tough seller’s market, there will always be a next home. You just might have to wait for it. It is better to wait for the right one versus overpaying for a home so you don’t find yourself underwater two years from now when the market turns.
3. Haunted Homes – My wife has been a huge ghost fan her whole life and she got me into it soon after we were married. We took a ghost tour of New Orleans in 2004 and I have not looked back. I give you a little background because I wanted you to know that for me, a haunted house would be a novelty. For most, however, haunted homes are not something they are interested in purchasing. Does this fact have to be disclosed? No, it does not, but I always tell my sellers to disclose too much versus not enough. Here is what the law has to say about disclosure of these types of homes.
SELLER’S DISCLOSURE OF PROPERTY CONDITION. (c) A seller or seller’s agent shall have no duty to make a disclosure or release information related to whether a death by natural causes, suicide, or accident unrelated to the condition of the property occurred on the property or whether a previous occupant had, may have had, has, or may have AIDS, HIV related illnesses, or HIV infection.
I have always found it strange that you have to disclose a murder on a property, but not a suicide. To me, both are stigmatizing events which impact the value of a home. Ghosts, however, do not have to be disclosed. In other words, you probably want to avoid any homes where your arm hair stands straight out as you look over the property. If you don’t believe me, watch the first season of American Horror Story. I felt for the poor realtor that was told to sell a known haunted house.
In summary then, in a seller’s market, it might seem that you have to bid on any house, but there are three homes you need to avoid even in a seller’s market. Don’t buy a house with foundation issues unless you are a pro. Be careful with bidding too high for a property. Finally, if you hear funny sounds while looking at a house, it is best to avoid buying it.