“Deals” And “Bargains” In Real Estate
The myth: It is widely believed by the public (and even by many real estate practitioners!) that there are “deals” or “bargains” to be had in real estate. The thought is that, in good markets or in bad, somehow a property can be purchased “below market price”.
The reality: There are three factors in real estate that combine to forestall the possibility of a below-market-price-deal:
1.) supply and demand that is reflected in
2.) price movement that is
3.) constantly tracked in real time in both the quasi- and wholly-public record.
The result is a ready reference of so-called “comparable” properties against which all other properties of like kind, condition and location are measured.
An example: No one would argue that in the market at the end of the last decade a property purchased for $325,000 that sold for $600,000 three years earlier is a “deal”; but once that property has sold for $325,000, all the comparable properties in the neighborhood take on the value of that sale. The identical model sitting next door or across the street can no longer be said to be “worth $375,000”, whether the $325,000 sale price was the result of a distressed sale (short payoff, bank owned, etc.) or not.
Another factor: A further element to be considered in a declining market is the effect of competitive pricing. In a balanced or rising marked, the most recent sold comparable (several, actually) will establish value for surrounding property. When prices are in a downward spiral, the asking price, when lower than those of surrounding properties, will to a great degree, serve as the “comparable” rather than recent neighborhood selling prices (would you pay $25,000 for a new car if the same model was available across town for $22,000 and you could be made aware of that fact with a few strokes on a keyboard?).
Bottom line: If there truly were “deals” in real estate, professionals would be grabbing them up; there is little evidence, even anecdotally, that such has occurred.
“LOWEST PRICE” VS. LOW INTEREST RATES
The dilemma: The thoughtful buyer must make a judgment about the direction of both pricing and interest rates, then strive to optimize the “tradeoff” between the two.
Tradeoff example: buyer can pay only $1,500.00 monthly principal and interest:
Home Price: $312,500 – Down Payment: 20% – Interest Rate: 6% – Monthly Payment: $1,499.88
But move the interest rate up just one percent, and . . .
Home Price: $281,250 – Down Payment: 20% – Interest Rate: 7% – Monthly Payment: $1,499.88
Consequence: In any given market, the buyer can acquire a property that has about 10% greater current value (read “more house for the same payment”) if interest rates are 6% than if they are 7%! It may not be wise to wait for the “bottom” of the market when interest rates are rising!