There are two main reasons a person may buy a home, as an investment and as a shelter. Having the right mindset of whether the home is an investment decision, or a housing decision can be a HUGE help when submitting your offer in a competitive bid situation as could be the case throughout 2022.
The red-hot real estate market of 2021 is cooling down a bit but is still simmering with most homes entering a multiple offer situation with some still seeing double-digit offers. With many factors of 2021 still in play in 2022, a home buyer cannot expect a dip in prices where you can jump in a score a “deal”. The facts are clear:
- Baby boomers are staying in their houses longer
- Millennials who are entering the housing market are a relatively large population
- Although interest rates are higher than a year ago, they are still at historic lows
- Home construction is still slowed as the shortage of some building materials continues
If it is an investment decision, over-bidding for a property may not be the right move. If it is a quick flip situation, even over-bidding by a slight amount could tank your ROI after your improvements are made and the home is sold again.
For example, 123 Main Street is on the market for $400,000. An investor sees the property and thinks if he could buy it for $400,000, put $100,000 of upgrades into it in the next 3 months, he could put it back on the market for $575,000. The investor would make a profit of $75,000 or 15%.
The investor submits his offer of $400,000 and the home enters a competitive bid situation due to the nice neighborhood it is in. The investor increases his offer to $450,000 to secure the property. He upgrades the home the following three months at the projected cost of $100,000 and is able to sell the house for $575,000. The investor’s profit is now $25,000 or 4%. Not a very good investment decision.
Let’s change the scenario to a newly married family with a couple of small kids. They look at this $400,000 house as a great place to raise their family. It is towards the high price of their budget, but they feel they can put some sweat equity into the property as they plan on staying there for 5+ years.
During the competitive bid situation, this couple stretches their budget and increases their offer to $450,000 so they can secure the home. Their plan was a good one. They viewed this as a housing decision. They loved the home and were in a position to be able to over-bid for it and still feel comfortable with the monthly mortgage payment.
The future is unpredictable, but home prices increase about 4% on average per year. If this couple stays in this home for 5+ years and puts in the sweat equity like they planned, when the time comes to sell, they will see a very healthy return on their original $450,000 purchase. Check out this site that tracks medium home sale prices from 1953 to the present. Historical Median Home Prices
If a buyer can change their mindset on purchasing a new home to a housing decision and not an investment decision, they will have a much easier time getting their offer accepted because they know that even if they have to increase their offer on any given home, in the long run, the asset will appreciate, and that good housing decision will eventually turn into a great investment decision.