When a Low Purchase Price is a Bad Purchase Price

When a low purchase price is a bad purchase price

 First, I would like to thank Mohom for supplying the full poem referenced in my last blog.  It just proves that with the internet, for every question there is, indeed, an answer.

On to today’s discussion.  Over the past few years, it can be easily said that homebuyers have been more interested in finding a foreclosure, distressed, or short sale “deal” than they have been in other forms of real estate transactions.  With falling prices over this time period, everyone has been concerned about overpaying for a home.  In this regard, there is a general logical position that being able to profit off of someone else’s misfortune is a sure way to make sure you are getting a good deal.  I guess that whole Goodwill Towards Your Fellow Man thing never really made it to the real estate industry.
 
Anyway, what if I were to be able to convince you that the lowest price is not always the best price and that a low purchase price is not always the singular best way to evaluate a real estate purchase decision?  Would you be intrigued?  Would you say I don’t know what I am talking about?  Would you be persuaded to continue to read the blog and recommend it to friends? (That, by the way, is the answer I am looking for.)

Let’s look at the general category of a distressed sale for a moment.  By its nature, you probably have a home that is no longer being maintained properly.  Let’s be honest, once a family decides that their home is seriously underwater, they will most likely not be putting in the appropriate time for upkeep and repairs.  What does this mean?  Well, for starters, the house may need to be repainted – both inside and out.  Flooring may need to be replaced.  Cabinets and countertops may need refinishing or replacement.  Appliances may be outdated.  As these homes are often sold as-is, where-is, there may be less visible issues as well.  The mechanical systems, predominantly air conditioning and hot water heaters may be in poor condition.  Roofs may be reaching the end of their useful lives.  And, if the house is over 30 years old, it may not be too far away from needing a full re-plumb (this may just be a personal issue for me, but I don’t think so).  This does not even begin to address the energy efficiency (or lack thereof) associated with the original construction of the home. 

Now, let’s consider a new home.  First of all, everything is NEW and the home comes with a WARRANTY.  Paint, flooring, appliances, mechanicals, and so on.  You are not replacing anything.  Chances are, you also had the ability to select everything you wanted.  Second, new homes are much more energy efficient.  That $300 - $400 energy bill in the distressed property may be more than twice what you would pay in a new home.  Some homes even have solar panel systems that take away your electric bill entirely. 

What I am getting at here is the difference between cost of purchase and cost of ownership.  Too many people get hung up on the purchase price.  Unfortunately, they forget that a home is not like a television.  It is not a one and done expense.  The older a home gets, the more money that needs to be put into repairs and upkeep on an annual basis.  Let’s say you could save over $300/mo in cost of ownership expenses with a new home over a distressed older home.  Now, you may be saying “Hold on, there is no way an older home will cost me that much more!”  Really.  Let’s take a quick look.  First, you will definitely have utility savings in the new home.  A conservative utility savings of $150/mo is not unreasonable based on the age of the older distressed home you are considering.  Next, let’s look at any upgrades you need to do to the house.  A new high efficiency washer and dryer alone will easily put you over $1,000, averaging almost $100/mo.  This is before any painting, landscaping flooring and other upgrades you may wish to put into the house on a yearly basis.  Viola!  Over $300/mo in extra expenses.  OK, so what does $300/mo mean.  Well, at a 4% interest rate, $300/mo equates to almost $65,000 in mortgage value.  Plus, a newer home versus an older home in a comparable location will probably hold its value much better.

Now, this is not to say that there have not been good values in the distressed marketplace.  However, before that home with the tilted shutters, mildewed roof and missing appliances becomes the home of your dreams, take the time to sharpen your pencil and see if a new home, while costing a bit more money up front, may actually save you a boatload of money in the long term.  (As a side note, it is ok to negotiate the purchase price of a new home.  The worst you will be told is no.)

Until next time,

Keep kicking the dirt.