Not long ago I heard someone gleefully say “I got a really good deal on a house!” When I looked up the county records, I discovered that the “good deal” was on a busy 4 lane road. The same kind of joyful exclamation might be made when purchasing next to a high voltage power tower, backing to a grocery store, or adjacent to a freeway onramp.
Guess what? If you buy a property with a major location defect, it will cost less than if you buy it in a quieter, interior neighborhood location. Getting the property for less doesn’t make it a good deal on a house. It just means you bought real estate that is less expensive because it’s an undesirable location. Someday, when you go to sell it, it will also sell for less than nearby homes in better areas.
Beware the “good deal on a house” thinking
Sometimes when home buyers score a great price on their new home it does not have a location defect. A closer look may reveal, though, that they didn’t look very hard at the disclosure package and there are fundamental issues with the property condition that will be expensive to repair, or that there are expensive items to replace.
Several times in my career, which is sneaking up on 30 years, I’ve worked with clients who were bargain hunters. This probably works better in locations outside of the highly competitive Bay Area and Silicon Valley markets. When these folks decide on a home, as often as not there is something wrong with the property that makes it less appealing to most buyers and therefore attainable for a lower price. Translation: it’s having trouble selling now, and if you buy it, you will have trouble selling it later, too.
The good deal on a house situation often comes down to one of these issues:
- Location defects. Realtors are notorious for saying “location, location, location” because it is crucially important. Choosing a less desirable one is the #1 mistake made by misguided home buyers looking for a steal of a deal.
- Land use issue, such as a large lot but almost no backyard or no useable yard (think large hillside lot with steep slope).
- Living space misallocation, such as having a very small kitchen but a house with 5 bedrooms.
- Property condition in need of expensive repairs and remodeling
What’s usually the case is that it’s difficult or impossible to fix what is wrong.
Related to this can be the issue of who you hire to assist you when buying a home. Maybe your sister just got her license last month in California and she lives 350 miles away, but if she’s your agent, she’ll give you 75% of her commission back. This is the largest purchase that most buyers ever make, and I would suggest that it’s wise to have the best agent guide and help you, not the cheapest one or the one who gives you a big rebate.
Most home buyers don’t know what to look for in the disclosures, inspections, or in the property condition when viewing the home, and most new licensees don’t, either. Consumers either don’t realize or don’t remember that not all buyer’s agents are equal in their skill set, knowledge, experience, or willingness to really fight for you. Some are just in it for a quick sale.
In short, the buyers looking for a bargain are setting themselves up to make a purchase that may not serve them as well in the long run as if they had made one with the basics in mind.
Next: 3 tips to help you get the best deal in any market.
The best home is one that you can sell later in any market
This is the most important element for home buyers. It’s usually but not only connected to location.
If you buy a house next to the Pacific Ocean today, where will the water level be in 20 years? If you sell it in 10, will the water be lapping at your door? The natural hazard disclosure may have a warning about that. We want to consider not just today, but as much as possible, what the future risks or benefits might be for any property purchase.
Clair’s and my clients know that we discuss buying a home with selling it in mind.
No home is perfect, but I tend to see real estate in a somewhat binary fashion:
- things over which you have some control and can fix or improve
- things over which you cannot control and cannot fix or improve
If you buy a brand new townhouse that backs up to a busy road or freeway, it’s not going to be better in 30 years. Fast forward 30 years and now you have an old home next to the freeway or busy street.
Sometimes these categories can be a little slippery, especially in a condo or townhouse complex.
If you buy an old condo and the electric panel is unsafe for this unit, you can change the one panel that you have control over, but there’s nothing that you can do about neighbors on either side of you with older panels. In fact, you won’t know from the disclosure package what kind they have an if there’s any risk from them. The electric panel issue might seem to fall into the “I have control” bucket, but actually, not so much when you consider that a neighbor’s panel could start a fire even if you replace yours.
If you purchase a home that is in a good location and the house has “good bones” but is simply dated or downright ugly (flocked wallpaper, anyone?), you can change that over time. New floor coverings, paint, and light fixture won’t be a fortune and they can make a world of difference while you save up to remodel the 1960s kitchen.
Of course, the issue of what’s in control or fixable does have some parameters. If after buying the new home there’s no money left but you have a scary electric panel or some other health or safety issue, you might want to downgrade your budget a little and purchase something that is already safe to inhabit. Your budget must work with the situation for it to be a good deal on the house!
How to find a good deal on a house
It’s not easy to find a sweet deal in a seller’s market, and we area almost always in a seller’s market in the Santa Clara Valley. You’re unlikely to get a low price in a multiple offer situation, so don’t bother if it looks like more than 3 or 4 offers, especially if the listing amount looks like a price mirage – offered crazy low just to get a bidding war going. Be realistic about the seller’s and listing agent’s strategy.
Look at homes for sale that are a little bit stale. Perhaps they’ve been on the market for 4 weeks or more and are just not selling. Pay attention to any price cuts. If they have been on the market for months and have never or seldom reduced their price, the odds are good that the main thing wrong with it – perhaps the only thing – is a price that is too high.
Get a solid down payment together so that home sellers will be convinced that you can close escrow. It is very difficult to get a VA or FHA financed offer accepted here, unfortunately. It can happen but it’s not common.
Even better is not having a mortgage at all. Cash is king! Bids that are all cash, no loans are still preferred by home sellers as there’s less risk and more speed to closing. If you happen to be a cash buyer, you may be able to save 2-3% compared to buyers with a mortgage. Many cash buyers seem to think it’s worth more than that, but my experience with sellers is that it’s not the case. They’ll wait 30 days for a mortgage to go through to make $100,000 or more as opposed to a cash deal. Who wouldn’t?
How to know if you’re getting a good deal on a house
In an any market, you’ll know you’re getting a good deal on a house if while your escrow is still going the other homes which are similar are closing for more.
Something that can happen which will make you feel better in a multiple offer situation is if the listing agent informs your buyer’s agent that there was an offer higher than yours, but that the sellers and listing agent wanted to work with you. Often, that is the result of better terms (fewer or no contingencies, larger down payment, or any number of things). Sometimes it is simply because the listing agent feels more comfortable and trusts the buyer’s agent – or perhaps has the opposite sense about the competitor’s agent or the competing buyers. Buyers or agents who appear flakey or difficult are less likely to get the home if there’s a choice.
Buyers sometimes wonder how to get an expensive house for cheap. There is no magic bullet for this, but stigmatized homes will sell for less, at least in the first few years after the stigma inducing event took place.
Getting a good deal on a house: related reading