Buying Real Estate in a Down Market- Things You Should Know
Investing in real estate is usually a deliberate decision and is not taken lightly. There are so many things that you have to consider before taking the step. One such essential factor that plays an important role when buying real estate is the condition of the market.
Many people are wary of buying a property during the time of the down market. The usual tendency is to wait out and see how much farther the property prices dip. However, just as it is with the stock market, the more you wait for the prices to lower down, the more risk you run of losing out on a good deal.
If the property market in your locality is undergoing a downtime, it is prudent that you invest in it. However, there are certain strategies that you must consider for a fruitful endeavor. In this post, we discuss in detail about buying real estate successfully during a down market. Read on to learn more about this.
The 3 Essential Strategies for Buying Real Estate
Here are 3 crucial points to be remembered when you plan on buying real estate in a down market.
- If you want to buy a more expensive home, then the down market is the right time for it. If you wait for the prices of the more expensive homes to fall further, you run the risk of increased competition. This can make those homes out of reach.
- However, if you can arrange for alternative housing after you sell your current home, then you can wait out for a couple of months. This will allow you to gauge where the market is going and perhaps cut a better deal.
- If you are planning to sell your existing place and buy a new one, then your best bet is to do it simultaneously. That way, your losses from the sale will be covered by the amount you save while buying.
Let’s Look at an Example
The best way to elucidate the above is through a simple and practical example.
1. Selling Your Current Home
Let’s assume that your current property is worth $350,000. However, since the market is at an all-time low, there are fewer buyers and more houses on the market. As such, you have to sell your house at a 10% loss, i.e. at $315,000. your “losses” in this transaction amount to $35,000
But, you probably had bought this house 8 years ago at $ 150,000. As a result, you are really $165,000 ahead (minus costs of selling) of the initial price you paid for the house.
2. Buying a More Expensive Property
Now, you want to upgrade your house and are looking at buying real estate that is more expensive. Going by the current market situation, you buy a $500,000 worth house at the same 10% discount. thus, you end up paying $450,000 and technically save $50,000 on the purchase.
3. Final Standing
When you look at your buying and selling numbers, you see the following-
- Property sold at $35,000 loss
- Property bought at $50,000 profit
- The net gain is of $15,000 (discounting the cost of selling)
Overall, this does seem like a sweet deal, doesn’t it? You get a better home and you actually save some money along the way.
The Impact of Interest Rates when Buying Real Estate
Considering the usual 20% down payment on an 80% conventional house loan, the principal and interest payments come up to the following-
- $425,000 sales price, at 4.5% interest, payment- $2,413.
- $450,000 sales price, at 4.0% interest, payment- $2,148.
- $500,000 sales price, at 4.5% interest, payment- $2,533.
- $525,000 sales price, at 3.5% interest, payment- $2,357.
While the monthly payments do not vary a lot from each other, the main difference is in the sales price. By opting for the house priced at $425,000 for a 4.5% interest over the $525,000 at 3.5% interest, you can save a whopping $100,000 on your transaction. However, if you wait for prices to fall further during the down market, you can lose the perceived value to higher interest rates. Hence you end up losing the optimum window of opportunity to invest in the market.
Final Thoughts on Buying Real Estate
Understanding the market and the locality is essential when it comes to successfully investing in real estate during downtime. That is why, sometimes, it is prudent to take the advice of experienced professionals to help you decide after weighing in on all the pros and cons. At Signature Properties, we understand the requirements of our clients and help them make the right decision.
Contact us today for a free consultation if you are planning on buying real estate.