There is a strong pulsating throb in the veins of home buyers right now, much akin to gold fever. Everybody seems to want to buy real estate. First time home buyers have a legitimate need to buy a home as they want to realize the American dream and lock in all those amazing tax benefits of home ownership (more on the decline of that benefit later). But what is really surprising is the strong surge of mom and pop investors who want to add a rental home to their portfolio. And then there are the speculators who are looking for a home to flip. The end result is a virtual feeding frenzy when a home in the target price range, $250-$350 K in my neighborhoods, hits the market.
One of the challenges for first-time homebuyers is that they, almost by definition, have to get a loan to purchase a house. Home mortgage loans are readily available and home mortgage lenders have a huge appetite for making these loans. The obstacle is all those safety rules and regulations that were put in place when we had that big housing recession in 2008-2010. First-time homebuyers have to jump through a lot of hoops to get a home loan and a lot of them just don’t make it to the finish line. And the appraisers are a challenge when a first-time buyer is getting an almost 100% loan. You can bet the appraiser is going to have their pencil sharpened when the loan to value ratio is high as in first time home buyer situations.
On the other hand, mom and pop investors are coming to the feeding frenzy with cash in hand. They are tired of sleepless nights worrying if their 401 K fund is going to drop 30% during the day as the Dow Jones average plunges due to a sell-off in China or a softening of consumer confidence in the US. It is just too painful to watch your life savings get sucked away while you are in an afternoon conference meeting. At least a house is something you can put your hands on and improve with sweat equity if you have to do so. Mom and Pop investors are willing to pay a good price for the “right” house.
Then we have the Flippers. These speculators know that if they buy a solid home in the right location they can make $50,000 to $100,000 by doing some work to the home and bringing the cosmetics up to 2018 buyer standards. It’s not that challenging and even amatur speculators are finding money to be made in flipping. It takes cold hard cash or a hard money loan and that is risky business. But the demand is there for homes that qualify.
So we have a “target” home hit the market and what happens?
The first time home buyers come look at the house the first or second day it is listed. They get a new listing alert through their email (sent by a savvy real estate agent who knows that if you snooze you lose). They see the house the first afternoon it is on the market. They need to bring their parents out the next day for approval. They like the house but it doesn’t have granite countertops and the carpet needs to be replaced. After seeing the home the next day the parents point out several other more serious defects. The first time homebuyers decide to make an offer at $10,000 below list price with the seller paying $5,000 in closing costs.
The mom and pop investors have bought and sold a couple of homes as they moved around the country. They show up the second morning and look the house over. It has a lot of potential. They like the idea of renting out the house – with very few changes right now – and then selling it 10 years down the road. They will have to do some improvements then but that cash does not have to come out of pocket for a long time. The mom and pop investors make a cash offer at list price. They know there will be a lot of competition for this house.
The Speculators look over the house about 4 hours after it is listed. They are sitting on go and the home fits all their filters. They see the home has the potential for a $75,000 profit after being fixed up. They make an offer of $5,000 over list price and in an “as is” condition (no repairs by the seller).
The sellers real estate agent gathers in the offers and in consultation with the seller calls for “highest and best” offers by 10:00 am on Thursday.
The First Time Homebuyers increase their offer to list price but they keep the seller paying $5,000 closing costs (because they don’t have the cash to pay it themselves). And there will be an inspection during the due diligence period when every possible defect is identified and the seller will be asked to repair.
The Mom and Pop Investors sit tight. They are confident in their offer. They will have the home inspected but will not ask for repairs unless the defect rises to the level of something costing $1,000 or more per item.
The Speculator/Flippers are looking at another house. They like the offer they made but bump it $2,000 to show they have skin in the game. They will not ask for any repairs and “as is” is inserted in the contract language.
Which Buyer do you choose if you are selling this home? Gold fever home buying is kicking in big time in the Atlanta market.