Everyone loves a bargain, right? This is true in almost all shopping scenarios. But when it comes to real estate, things aren't always as advertised. And like many bargains, you get what you pay for. Let's take a look at what makes a home a bargain and whether it's the right move for investors and homebuyers.
Where to find bargain homes
A bargain home is one priced lower than the comparable homes (comps) in that area. Trulia (NYSE: TRLA) defines a bargain home as one whose price has been reduced by anywhere from 2% to upwards of 20%.
Some regions in the U.S. are known for having a larger selection of bargain homes; Trulia says the Midwest and the South are hot spots for bargain real estate. But as it turns out, the word "bargain" is often misused by many a bold real estate agent in listings. To that point, Trulia reports that only 55 out of the 100 largest housing markets in the country had homes that were actually bargains -- meaning they were selling at prices lower than the comps.
So what's happening in the other 45 markets? Properties listed as "bargains" are going for the same price as neighborhood comps. It's important to note that a home is not a bargain simply because you can well afford the down payment. And it also may not be a bargain home if it's located in a town with a lower cost of living than your own.
For example, it is entirely possible that homes in regions where the cost of living is lower could sell for above the asking prices -- it all depends on how stiff the competition is in the real estate market. And while it might seem absurd, there are bargains to be had in the luxury market, too. A mansion that is on the market for $10 million but sells for $9 million would be seen as a huge bargain -- even though the term "bargain mansions" would seem to be an oxymoron.
It's also worth noting that while short sale and foreclosure listings can indeed be bargains unto themselves, depending on the final price, not all are bargain homes. Again, it all comes down to market value. And in tighter real estate markets, sellers will not be as willing to make concessions for buyers, so the discount on a "bargain" home can quickly shrivel up.
The major advantages -- and disadvantages -- of bargain homes
The biggest advantages and disadvantages of bargain homes all come down to one thing: money. While you are able to save money with the sale price of the property, you will need to leave room in your budget for improvements.
Let's take a look at some of the pros and cons of investing in bargain homes:
|• Bargain homes can be a good deal -- which can be hard to ignore for a savvy investor looking to expand their property portfolio.||• Bargain homes are typically not turnkey properties. The reduced price indicates that work -- often extensive work -- needs to be done.|
|• Fix-and-flip investors especially can get more value for less money -- even if it means pouring a considerable amount into a renovation.||• They might not be the best move for new investors, who are likely wary of taking on that much risk early on.|
|• Bargain homes are good "starter homes." Even those not interested in real estate investing can make upgrades and later flip their own home when it's time to move on.||• There's a fine line between putting some cash into upgrades and having your new investment property turn into a money pit.|
|• They are a good move if you have a flexible time frame for moving in or fixing and flipping.||• They are not ideal if you're on a tight time frame for repaying a loan.|
Should you invest in a bargain home?
If you're an investor in the fix-and-flip market, then the short answer to this question is yes. With fix-and-flip projects, it goes without saying that you want to save as much money as you can on the price so that you have room in your budget to make the necessary repairs and upgrades while still making a tidy profit.
Of course, not all fixer-uppers need the same level of TLC. Some are mainly cosmetic fixes, others need to be gutted, and some have structural issues that must be attended to before anything else. Unless you're buying a foreclosed home at auction sight unseen, you have some time -- but likely not too much -- to find out more about the condition of the bargain home you have your eye on and to make an educated decision on whether to purchase it.
When making an offer on a bargain home, don't come in with an offer that's too far below the asking price. You'll risk insulting the seller, who may not be willing to negotiate at all after your paltry offer. But if it's been on the market for a while, then you can come in with a lower offer to start and work from there.
Keep in mind that another bargain hunter -- or several -- will likely also have their eye on the same property. You don't want to engage in a bidding war. Some of these so-called bargain homes in competitive markets end up selling for at or above their asking price because of the high demand. Don't let your return on investment (ROI) disappear for a future rental or flip in your quest for a bargain.
Bargain homes and your bottom line
A true bargain home lives up to its name. To get more bang for your buck, search out those properties that are listed below their comps. Just know that others are doing the same. You may have to make a quick decision as to whether the necessary renovations and upgrades will be worth it.
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