Depending on where you are in America right now, real estate might look like a very tempting investment. Across the board, housing prices have dropped by 50% or more, and interest rates have never been lower in our lifetime. What could possibly be bad about taking some money and putting it back in the housing market right now?
Unfortunately, quite a few things can be bad. Because in this market, in this economy, the money you’ll be spending is only part of the equation. The other, more difficult part is how you are going to get that money back.
First of all, just because the price of a property has dropped by half doesn’t mean that property is undervalued, and that all that equity is going to come back sometime in the near future. Remember those real estate prices that kept climbing and climbing? We just got out of that bubble, and some experts feel the recent price drops were more along the lines of a correction. And the fact is, whether or not prices will eventually go up (and I do believe they will), and regardless of how high they will go, real estate is definitely not the place to make your money back in a short period of time.
The reason? Maybe you can buy a property at an attractive price, with attractive terms. But will you be able to sell that same property for a price you consider equally attractive?
Is the area attractive to actually live in, or just to buy a property to sell in? Because the wrong area isn’t going to attract the right buyers. And by “right buyers,” I mean buyers who will be able to qualify for a loan.
Actually, I’m getting ahead of myself here. First, you have to qualify for a loan – something that is much more difficult now than it was during the heyday of the real estate bubble. And if you qualify? Again, your buyer also has to qualify, adding another hurdle for you to overcome. But for the sake of argument, let’s say your buyer qualifies with flying colors.
Think you’re out of the woods? Think again. Now the property itself will need to qualify – and that means appraising at a high enough price to justify the selling loan.
One casualty of the financial crisis is that the appraisal situation is just crazy. Maybe it’s because of the massive price drops and fear that we haven’t reached bottom yet – but whatever the reason, it’s hard for us to make any sense of it. We’ve heard stories from those who have tried to refinance property and had their appraisal come in at less than what they owe. Since appraisers have to use comps of sales within the past 12 months, they can only deal with “post-bubble” property values.
Of course, with prices and interest rates so low, property is hard to turn away from. So my advice is be careful, be very careful. Think about the location, the type of buyers you’ll attract and what the appraisal value might be when you try to sell for (hopefully) a tidy profit. It may be that right now isn’t quite as great a time as it seems to jump back into real estate.