Buyers need to be very careful in this market when deciding which type of home to buy. Many buyers feel that purchasing a foreclosure is going to be the best deal for them. This concept, however, is a fallacy in some cases. Since Maricopa County has a very low level of listing inventory at this time and buyer demand is high, most listings are priced at market value or above. The only time we see a property under market value is in a short sale situation when the property is distressed or has a poor floor plan.
In most cases the bank-owned inventory is priced according to the condition of the property. The banks are now pricing their homes over market value due to the demand and the fact that most of the properties end up in a multiple offer situation. Most bank-involved properties are not in move-in condition and require new paint and flooring at the very least. What appears to be a good deal, may not be so good if the buyer purchases a property at market value and then must deal with repair issues and and upgrading the house. These extra out-of-pocket costs will put the buyer into an instant negative equity situation. In the event that they had to sell the property again in the near future, they would be up-side-down. In some cases, it is better for a buyer to purchase a regular resale that is priced slightly higher than market value and is in move-in ready. In the case where a buyer wants to have a pool, it is much more cost effective to buy a house with a pool already in ($10,000 value) rather than purchasing a new pool ($30,000-$60,000+).
Example: Property appraises for $125,000.
1 - Buyer A purchases a property slightly under market value that appears to be a good deal at $120,000. Buyer spends $20,000 to upgrade appliances, carpet, paint, window coverings and backyard landscaping. Now he has spent $140,000 and is now $15,000 up-side-down.
2 - Worse yet, Buyer B buys the same house and spends $20,000 to upgrade appliances, carpet, paint, window coverings and backyard landscaping. He also adds a pool at $30,000. Now the buyer has spent $170,000 and is approximately $45,000 up-side-down. His new pool has a $10,000 value and the new upgrades he put in have little or no value to an appraiser.
3- Buyer C buys a resale home, the same model as above with a pool. Buyer pays $135,000 cash for the home and has no out-of pocket expense and is now $10,000 up-side down.
Who is the smarter buyer? An appraiser will give a $10,000 adjustment for a pool at the highest, no adjustment for window coverings or new carpet or paint.
What happens if these buyers need to sell their home unexpectedly? This economy is scary. What if the buyer gets laid off from their job and is forced to sell? What is the buyer transfers with work?
Another option for buyers now is new construction. The prices are a little higher, but the buyer gets a brand new home with a warranty. These houses are also built better in many cases as well, with a more energy efficient ratings due to low E windows, higher seer A/C and 2 x 6 construction. Some new home builders such as Meritage and Beazer have included solar panels for solar hot water and furnace; low flow faucets, spray foam insulation, double flush actuator toilets, insulated water heater and raid bird weather sensing irrigation. In the long run, the buyer ends up saving thousands every year in energy costs and tax credits. They still have to spend money to put their window coverings in and do their landscaping, which easily puts the buyer into an instant negative equity situation. The best deals on new construction are found with the builder's spec homes, which are completed homes or almost complete homes. The builders want to get these off their books and therefore, the buyer can negotiate the price and sometimes landscaping and window coverings.
In summary, we believe the best deals right now are with some short sales, builder spec homes, or reasonably priced re-sale homes. It is important to find the home that closely matches the buyer's tastes and one that will require minimal upgrading or repairs. It is worth making offers on the bank-owned properties as long as the buyer does not over bid and as long as they know that it is difficult to get an offer accepted. If the buyer has cash, they must be extra careful, as they will not have an appraisal to protect their price point.
We have seen some increase in value in the past few months and now is a great time to buy as home prices are down 70% in some cases off their highs several years ago. Please call us anytime to discuss your buying needs.
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