People always ask, “Is it a good time to buy real estate?” The answer is always, “Yes, but it depends.” In order to make that determination for you, we first must understand the three most important words in real estate:
We buy property, whether a personal residence or for investment, in hopes that we are financially better off down the road than we are today. The chance of that occurring is very low if one does not own real estate for at least five or more years. The reason is that transaction costs, repairs, monthly ownership costs higher than comparable rent, and ownership hassles dictate that it is better to invest your money elsewhere and stay as a renter if you are not sure you will own long term.
Therefore, since you are going to be a long-term holder (the longer the better) you really should not be that concerned with short-term current market price fluctuations because ten years from now the home’s value will be more than it is today.
What you should be concerned about is finding a house that you “love”— one that fits all the right reasons you want to own that particular property for a long time!
That could almost be the end of this article…but there are a few more issues to consider to make sure it is a good time for you to buy property. If you fail any of the below tests, you should think through the issue(s) and whether or not it really is a good time for you personally to buy.
1. You are planning to be a long term holder, 5+ years of course
2. For owner occupants – payments are affordable and you have a steady job
3. It isn’t significantly more expensive to own over renting – this very important.
4. For investors – It makes cash flow sense, 4-5 percent-plus cash on cash. The higher the better but watch out for returns that appear too good to be true.
5. It is the RIGHT property for you for all the right reasons; you “love” it!
6. It is fairly priced relative to the recent comparable market sales in the immediate area for similar properties
7. You plan to own it for a long long long time!
8. Vacancy isn’t too high in the area. This is very important whether an owner occupant or investor. Empty unstable neighborhoods or communities have a higher risk of vandalism and risk downward price spirals.
9. It is in decent shape and doesn’t need much fixing-up. Skip the junkers, the ones with foundation issues, or anything labeled as “needs a little TLC” in the listing, as that means it is a wreck. Leave the fixers for the contractors. And doing it yourself doesn’t usually save you much money.
10. It is not near a big vacant parcel, non-residential zoned parcel, empty or retail/industrial/religious site where you are not 100 percent sure what is going to be built or in use there. A new use of that land could impact your “quiet enjoyment” of your residential unit.
11. You complete the proper due diligence steps to reduce your risk as much as possible. Mind your contract terms and contingencies, pencil out your deal, get a couple of bids on financing and dissect your GFE, review the HOA condition, review the property condition, make sure you have the right type and amount of property insurance in place, make sure you adequately review the title abstract and title policy and everything else you need to do to lower your risk.
12. And you plan to own it a long long time!
Those Three Important Words? I laughed when someone once said “location, location, location” were the three most important words in real estate. Not only is that actually only one word but we pay a handsome premium for “location” and is that premium worth it? It may or may not be, but “long-term ownership” are by far and away the three most important words in real estate.
To summarize: Subject to the above issues, it is always a great time to buy real estate but:
Not for everyone,
Not at any price, and
Not just any property.
Find a house you love or rental property that makes sense, that you will own for a long time, is in decent shape, lock in a long-term mortgage and sleep well.
Leonard Baron, MBA, CPA, is a San Diego State University Lecturer, a Zillow Blogger, the author of several books including “Real Estate Investment – Rental Properties, Foreclosures, Short Sales” and “Buying a House, Condo or Townhome – Guide to Smart Purchasing” and loves kicking the tires of a good piece of dirt! See more at ProfessorBaron.com.
August 25, 2011