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Cheap Houses - Opportunity or Money Pit?
I had to go to the grocery store on Saturday afternoon to pick up some basic items. You know, bread, milk, tomatoes, etc. Our favorite local store is closed on Sundays so on Saturday they normally mark down some perishable items with huge discounts. It's extremely tempting to snatch up some of these cheap items unless one realizes that there's a good reason the price is reduced.
That discounted loaf of bread has already reached its "sell by" date. Before we can use the whole loaf it will most likely become moldy and we'll have to toss half of it. That gallon of milk is also about to expire; by the time we get through half of it, the milk will probably sour. And that shrink-wrapped package of six tomatoes? They're already getting soft - how fresh will they be in 2 or 3 days? Ugh!
Sometimes cheap is just cheap. The real estate market can be compared to the food market - there's always a reason that a discounted property is priced so low. Determining why an inexpensive property is priced so low is critical in order to determine if it is truly "worth it" to pursue. Obtaining the advice of a well qualified buyer's agent is very wise move to make before committing to purchase a cheap home.
The reasons that homes are listed at bargain prices can generally be classified in just a few categories:
1. The Handyman's Special
Many homes that have fallen into disrepair can be purchased at prices well below the local market price of well maintained properties. If the current property owner is unwilling or unable to make necessary repairs their only option would be to offer it for sale at a bargain price.
If the prospect of investing "sweat equity" (i.e. manual labor) is particularly unappealing, you may want to avoid this type of cheap home. Likewise, if paying someone else to perform the necessary repairs is out of the question - walk away. However, If the prospect of doing the work yourself doesn't make you uneasy, these fixer uppers can be an excellent choice.
2. A Less Than Desirable Neighborhood
It's become a trite saying: the three most important aspects of real estate are location, location, location. Well, although trite it's also true. Property values can vary significantly, depending upon the neighborhood. This can make homeowners in an upscale location very happy indeed. However, it can be financially devastating for a homeowner in a neighborhood that has been deteriorating. Contrary to many people's mistaken belief, property values do not always increase over time.
In urban locations, some neighborhoods that have declined are gradually being revitalized through the renovation of individual homes. As these improvements spread, the potential value of homes in the immediate area can start to climb. Your buyer's agent should be able to give you an idea about the direction that prices are moving so that you can make a well-informed decision about the potential value of cheap properties that fit this category.
3. "Priced to Sell Quickly"
Circumstances may arise when a homeowner is under pressure for a speedy sale. The seller may need to liquidate assets for immediate cash in hand. He may be facing a deadline relocate for employment purposes, or he may need to stop paying double mortgage payments if he has already committed to purchase another home.
Inexpensive homes in this category usually provide the best value. However, these bargains do not normally remain on the market very long since a fast sale is the very reason that the property was discounted. The best approach to finding these fleeting opportunities as they arise is to have your buyer's agent notify you when new property listings hit the market. Most real estate agents have access to automation tools that will automatically notify you via email the same day that a property that meets your requirements is put up for sale. Without that type of competitive edge, it's likely that you'll never hear bout these prime opportunities.
4. The Unknown Reason
This is the "catch-all" category for homes that don't seem to fit any of the three previous categories. They are the riskiest properties and should be approached with extreme caution. There is always a reason for a house being under priced - if it's not apparent at first glance you may have to do some serious investigating before considering a purchase. Sellers are obligated by law to disclose any information that affects the home's value. Your buyer's agent will prove invaluable in these cases by helping you ask the right questions.
Obtaining the advice of a buyer's agent and investigating the reasons that "bargain" properties are priced so low are the keys to discovering the true value of a "cheap" home. These deals can look very attractive at first but, only after further evaluation, will you have an idea if a property may turn out to be a "money pit" or a fabulous opportunity. You won't regret performing your due diligence.
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