Does property meet buy-and-hold test?
Location has been touted by housing experts as the most important factor to consider when buying a home. Does this adage still hold, or has price trumped location as the most important consideration?
Historically, home values were largely dependent on location. Homes near major metropolitan centers were more coveted, and more expensive, than similarly sized homes in outlying suburban areas.
The recent frenzy of distressed homebuying activity in places like Concord in the East San Francisco Bay Area and Riverside County in Southern California raises the question of whether a fire-sale mentality has permeated the residential housing market.
Most of the foreclosure-sale activity that occurred in the fourth quarter of 2009 was speculative. Investors bought at huge discounts from peak price levels in areas that are not, by traditional standards, thought to be prime locations.
The profitability of these investments will depend on the strength of the economic recovery. To fix up and flip a foreclosure for profit depends on demand from financially qualified buyers.
Foreclosures that are fixed up to rent require tenants with jobs who can afford to pay enough to cover the investor's expenses and hopefully generate cash flow. In a strained economy with high unemployment, this can be risky proposition.
HOUSE HUNTING TIP: Although buying cheap housing may be a good strategy for some investors, buyers searching for a home they'll occupy should not let price be the primary factor influencing which home they buy.
A home that won't work for the long term is not a good deal even though it's cheap if you'll have to move again in a few years. In fact, you could lose money using this approach, particularly if home prices haven't stabilized by then.
It's also not a good idea to buy a home that's not quite right for you just to take advantage of today's low interest rates. The winning strategy for today's homebuyers is to buy and hold.
The homes with qualities that are in high demand are located near a major metropolitan center or have good public transportation to get there. They are close to shops, cultural venues, restaurants, parks, and have good public or private schools close by and good public services.
The location within a neighborhood, condominium complex or cooperative can make a big difference in value. A home on a quiet cul-de-sac will generally sell for more than one in the same neighborhood that's on a busy street. Premiums are paid for homes with views, leveled-out private backyards and good natural light.
Be wary of listings that appear to be underpriced. They could be priced low to generate multiple offers, so they might sell for more than the list price and more than you can afford to pay. Or, there could be other reasons why they are listed at a lower price.
Often the lower-priced homes in an area don't sell for more because they have incurable defects. An incurable defect is something you can't change like a shared driveway, close proximity to a freeway or an entry to the home that's two flights of stairs up from the garage.
These homes may sell well in a hot sellers' market when buyers overlook defects because prices are rising rapidly. But, these homes can be hard to sell in a down market when buyers are less forgiving and are willing to wait for the right house.
THE CLOSING: Ideally, you want to buy a home that will be in demand in any market. If you can't afford to buy one that's in move-in condition, it's better to buy a home you can afford and that needs only minor improvements than one that looks great but has an incurable defect like an unworkable floor plan.
Dian Hymer Inman News August 22, 2010
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