Abort
Posted on March 28, 2007 - Filed Under Housing |
Remember the two houses? The numbers show they don’t work.
The Spanish style house.
Holy cow that house is beautiful. It needs some work. But the monthly payment, which was feasible, was just too tight for my comfort level. In order for the mortgage to work, certain items in my budget would have to be sacrificed.
Such as eating. I love eating too much. Plus I can’t live without my trips to France.
The Cottage House.
The mortgage payment here was more comfortable. The problem was the area in which the house was located. For this particular house, in this particular neighborhood, the asking price was at the extreme high end of comparables (comps) in the area.
I’ll explain. Please refer to Defense Exhibit 1 on the right.
When purchasing a house, it’s always good to look at what other houses are selling for in that area. Look for houses that are similar size, same number of bedrooms, same neighborhood. Obviously, some houses will be worth more and others less.
There is always a range.
In Exhibit 1, House A is the top end house valued at $650,000 and House B is the lowest priced house at $450,000. What I want is a house at or around $550,000: the mid-point.
Why?
I’m glad you asked.
If I purchase a house at $550,000 and put $30,000 worth of renovations into it, the house has the potential to be worth $650,000. Why? Because other houses similar to this one are already valued at $650,000.
Since the asking price is at $650,000, if $30,000 worth of renovations were put into it there’s no guarantee I’ll get my money back out of it.
Some simple reasoning draws one conclusion: he may come down twenty or thirty thousand but not a hundred thousand. For me to get what I want out of this deal, he would have to reduce his asking price.
This may take some time. I thought for sure that either house would work but, as I’ve learned, you have to listen to what the numbers are telling you. This is why we analyze.
Fortunately this is a buyers market. I have a large selection.
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Best of luck locating your next deal! I’m glad to see you’re not trying to force the numbers to work for you because of your enthusiasm–that’s how investors get into trouble.
Thanks Trisha! It is difficult to practice the “Don’t fall in love with a property” idea. When they look really really nice with lots of potential . . . then the numbers don’t work.
Fortunately, I’m not pressed to find something right this minute.