Is it possible to get a great deal when buying a house?

We’ve received thousands of inquiries from potential home buyers over the years. By far, one of the most common things we hear is “I want to get a great deal, so send me homes that are fill in the blank.” The “fill in the blank” part is stuff like under market value, foreclosures, short sales, fixers or homes that will appreciate more. The simple fact is “getting a great deal” is very difficult to achieve in real estate. There are bargains out there, but market forces often work against anyone getting a really “great deal.”

If you think it’s a great deal, so will everyone else

great dealHomes come on the market all of the time that are listed below their current market value. Sometimes it is a strategy to generate a frenzy of buyers and other times it is just a faulty estimate of what the home is truly worth.

If you call your real estate agent and say “wow, this house looks under-priced,” I guarantee that 30 other home buyers just made that exact same call. Yes, the list price is great, but the competition from buyers is going to drive the price up to what the market will bear.

Homes in distress aren’t a magic source of “great deals”

Many buyers will call us and say “I only want to look at foreclosures” or “I only want to consider short sales” because I get a better deal. Restricting your search in this way is sure to miss out on homes that may be a better deal.

The most obvious problem here is that in Seattle, foreclosures and short sales have declined precipitously over the past couple of years. At the moment in the City of Seattle, less than 10% of home sales are foreclosures or short sales. In popular neighborhoods like a Ballard or Queen Anne, these numbers are even lower, at 1%-4% of the total homes for sale. There are simply not enough distressed homes in our market to make this your only source of homes.

Also remember that buying a foreclosure or short sale comes with risks and hassles. The homes are often neglected and can have significant deferred maintenance. If a home needs $50,000 in repairs, you better be able to buy it at $50k less than similar homes, since the fair market price needs to reflect it’s condition. On a short sale, there can be lengthy delays while waiting for approval. There is an opportunity cost to you as a buyer to wait out the uncertain process, which is why short sales usually sell for slightly less than market value.

Bankruptcy sales can add another layer of uncertainty as well. They may be listed at an attractive price but may include somewhat exorbitant fees that the buyer has to pay for.

Lastly, foreclosures and short sales are not immune to competition and over-paying. I’ve been involved in plenty of bidding wars for short sales and bank-owned properties. Some of them land at a fair market price, but others get bid up irrationally.

Fixers can be a good deal, if you can compete with seasoned investors

Distressed properties are not immune to buyer competition. In fact, in our experience, the competition can often be even more frenzied when buyers see an opportunity to add value to a home that has been neglected.

If it’s obvious that a home’s value can be increased with a rehab, it is going to attract many seasoned investors looking to turn a profit. An experienced home flipper is going to have a significant economic advantage over a typical home buyer. They bring cash to the deal along with a construction crew at-the-ready that can make quick work of home improvements. If you plan to owner-occupy the home, you can probably pay a bit more because you don’t have to turn a profit, but you still have to compete with a hoard of cash buyers and have to deal with the hassle and time commitment of rehabbing the home.

A “great deal” on a “great house” might involve paying slightly more than fair market value

If you live in an urban area with a decent amount of home buyers, a great house in a great location is unlikely to ever be a great deal if it is listed for sale on the open market. There are simply too many people interested in such a home. Even in the depths of the down market of 2008-2010, we saw ~15% of our home buyers facing competition for this exact reason. It wasn’t super aggressive competition like we’re seeing in the today’s market, but the really appealing houses still got bid up to their fair market value.

If your goal is to find a home that you can enjoy and raise your family in for the next 10+ years, the best deal can often be slightly overpaying for an outstanding house that everyone else wants. Yes, you might pay $5k-$10k more than what the market will bear to get the house, but that will be a largely irrelevant amount in the grand scheme of long-term home ownership. I’d much rather slightly overpay for a great house than buy the problem house that is going to be difficult to resell.

Technology means that homes can’t hide

Real estate technology has really leveled the playing field for home buyers and sellers. In a matter of minutes, I can post a home for sale that will be seen online by thousands of home buyers and real estate agents.

Gone are the days when real estate agents held a big cache of “secret listings”. The advantage of marketing homes online is simply too powerful for sellers to ignore, and any agents who are trying to hold back homes for sale in secret are only doing so to benefit themselves, not their sellers.

Is there anywhere that I can find a “great deal”?

There are still opportunities for a deal in real estate, but some of them require patience and persistence which doesn’t always work with the typical time frames of a home buyer.

Off-market deals

A small percentage of homes do not hit the open market. Maybe they get sold to a friend, family member or neighbor. Personal relationships can lead to a good deal, but predicting when deals like this are available isn’t easy.

I’ll be honest, I’ve seen deals like this between acquaintances where one party is clearly being taken advantage of by the other. A buyer believes they are getting a great deal because only they can buy the home, but they end up overpaying for a home is shabby condition. I’ve also seen the opposite where the seller is uniformed about the true market value of their home and sells it to an acquaintance that they trust but could have gotten more if they put it on the market.

Foreclosure auction

Buying a home at the foreclosure auction is far different than buying a bank-owned home that is listed for sale. There are definitely homes available at a foreclosure auction that are a great deal. However, you need to be able to tolerate the risk of not knowing anything about the condition of the home and have to have the resources available to fix it up.

Foreclosure auctions also require payment in all cash, or have to be financed with an expensive hard-money loan. A home at a foreclosure auction is only a deal if you factor in these additional costs.

The vast majority of home buyers do not have the time, experience, risk tolerance or patience to be a successful buyer at a foreclosure auction. It’s exceedingly difficult to track which properties are actually coming up for auction, versus the ones that have been delayed or cancelled. You also need to drive around and be able to evaluate houses by looking at it from the sidewalk. Then you need to spend a half day at the auction every few weeks to actually be around when it comes up for bidding. Being a successful bidder at a foreclosure auction can be a full-time job.

Fundamentally alter a home to its highest and best use

There are homes where you can dramatically change the value through a major remodeling project. Changing a 2-bedroom/1-story bungalow to two-story home with 4 beds can dramatically affect the value of a home, even more so if you are able to take advantage of a view. Or maybe you convert a duplex back into a single-family home because that it what is most popular in a particular neighborhood.

The problem is, these are projects that require larges amounts of money and time. A major home remodel is often measured by how many hundreds of thousands of dollars you spend. It wouldn’t be a stretch to spend $300k-$400k to add a second story to a home. It also requires a large amount of time. You need to dedicate 1-2 years to a project like this.

Focus on your home-ownership goals and get the best deal you can

For the vast majority of home buyers, the goal is to achieve a long-term residence for their family. Chasing too hard to save a buck can leave buyers frustrated or worse yet, they end up buying a problematic house that they do not enjoy and is a pain to resell in the future.

If real estate investment is the goal, then you need to identify the goals and time horizon for your investment. Someone looking to flip homes needs a much better “deal” than someone planning to buy and hold for long periods of time. The most successful real estate investors are not hobbyists. They dedicate a significant amount of time and energy to the process.