Having your home appreciate $50K in one year sounds good. But if you don’t already own a home, getting one can be problematic.
The competition to buy a house is about as steep as the Beanie Baby craze of the mid-to-late 1990s — people would buy the toys as a financial investment, trying to cash in on a high resale value. The plush toys were fetching top dollar due to high demand combined with planned scarcity.
The company would “retire” a plush animal to increase its worth in the market. After several years of manic Beanie Baby buying by consumers, however, demand dried up. The reason: The same day in January 1999 that many Beanie Babies were retired, 24 new styles of Beanie Babies came on the market for sale. That overwhelmed consumers who were already starting to weary from Beanie Babies, marking the beginning of the crash of the Beanie Baby market.
If housing supply ever outpaces demand, we might see a housing crash. And that might happen if we were to be inundated with different types of housing products, as we could be from 3D-printed houses, perhaps. America’s housing supply could also outpace demand if consumers, wearied from the house-buying process, get used to being renters instead — maybe moving onto other types of investing. If those things happen, we might see house prices drop like a 50-pound bag of plush Princess Bears.
While a decline in housing prices might happen at some point, it probably won’t happen this year. If you believe Fannie Mae, 2022 will be just the opposite, kind of like Beanie Babies circa 1997 — still extremely popular even after a couple of years of intense competition and soaring prices.
Image Source. Getty Images.
Scarcity in the housing market
We’re experiencing scarcity in the housing market today post-pandemic. But the stakes of not owning a house are greater than not owning a collection of Beanie Babies. We can live without toys but not without shelter; if we don’t own, we rent.
We can delve into the whys of the housing scarcity. But if you want to invest in real estate, you first need to focus on obtaining a property. Here are some tips for buying a house this year and, ideally, a house that could earn you substantial appreciation with little to no work.
Get your financing squared away
In this market, when you find a deal, you need to be ready to act. Ideally, you’ll be an all-cash buyer to get a leg up on the competition. Indeed, more and more buyers are all-cash buyers these days. According to the National Association of Realtors, in July 2020, 16% of buyers were all-cash buyers, but in July 2021, 23% were. And no, you don’t need to have actual cash saved up to be one. Here are some ways to accomplish this feat:
If you already own property
- Use a cash-out refinance: I’ve used this method. You can take out 80% of the equity in your home and use that money to buy an investment property as a cash buyer.
- Take out a home equity line of credit (HELOC): I’ve used this method, too. You use the equity in your current home to buy another home. Make sure you can afford to make the HELOC payments in addition to your mortgage, or you could lose your primary home.
If you don’t own property
- Use a hard money lender/bridge loan: These are private individuals or companies that lend money based on the value of the property you wish to buy. The money is usually available fast, so you don’t lose out on the deal. These loans are typically expensive and must be paid back quickly, such as in a few years. Use this only if you’re confident you can repay the loan when it’s due, either by selling the property or taking out a traditional mortgage.
- Use a company that buys the home for you: Ribbon, for example, for a fee, will buy a home for you. You then rent from Ribbon until you get a mortgage to buy the home back from Ribbon. (This is available only in certain states.) Accept.inc, a lender, can prequalify buyers to make a cash offer using Accept.inc’s money. You then buy the home back from Accept.inc. HomeLight Home Loans does this as well, limited to certain states.
If you won’t be an all-cash buyer, you must get pre-approved for a mortgage before shopping for homes. In an environment where homes are going for over asking price, you’ll need to know how much you can spend.
Focus on new builds
In my area of Atlanta, where the competition is extremely fierce for single-family homes in the $400,000 to $500,000 range, it can be easier to buy a new build. Depending on the stage of development, you should be willing to wait up to a year or more.
Whether you buy a lot to be developed in a community or a house that’s almost finished, you lock in at today’s price. I used this strategy in 2016 to get into my primary residence. This approach works best if you plan to live in the house yourself or sell after appreciation.
If you plan to buy the house to rent out, you need to ensure the homeowners association (HOA) allows this. Note that the developer sets the HOA covenants, but at some point, the homeowners take control and can change the covenants, so allowing renters might not be guaranteed.
New builds at this price point, in my area at least, are often built rather quickly, and the work quality isn’t always up to par. Don’t skimp on inspections. Have a professional home inspector come out. The two best times are just after framing before the drywall is put up and again before you move in. It’s best to wait to move in, delaying closing if you must, until the builder addresses any major (and sometimes even minor) repairs.
Consider fixer-uppers
Fix-and-flip investors generally focus on distressed properties, and those are hard to find these days. But in today’s market, you might want to expand your horizons and consider houses that need work — if you can find one. Make sure you get the home inspected so you’ll know how much the repairs will likely cost you. It’s more work on your part, but if it gets you into a home, it could be worth it.
The offer process
Many homebuyers are making offers on multiple homes at once, hoping that one seller will bite. That strategy could work, but a better one might be to pick one or two homes you really want and be hyper-focused on getting them. You can add an escalation clause, for example, in your offer. This means you offer a certain price but tell the seller that you’ll go up a certain amount to beat any other offers. Make sure you put a cap on your escalation offer. Also, the fewer contingencies you put in your offer, the better. The main contingencies people use are financing, appraisal, and inspection.
Don’t wait
If you’re waiting for a price decline to buy property, you might be waiting a long time. Fannie Mae predicts house prices will rise 11.2% this year.