I'm often surprised, and occasionally amused, at the conventional myths that many people cling to in Real Estate. How many of the following do you embrace?

 

Myth #1  - Foreclosures are a good deal.

Let's define a good deal.  A good deal is buying a house for under market value.  OK, so what is market value?  I think market value includes two aspects.  Intrinsic value and risk.  Simplistically, you could say this:  Market Value = Intrinsic Value - Risk.  Houses work just like stocks, or any other type of investment, there is often a risk premium.  When the risk premium is low, the price of the house tends to be high, or feel expensive. When the risk is high, the price of the house tends to feel low, or inexpensive.  Foreclosures involve a lot of risk, and that's why the prices they sell at tend to be attractive to relative sales in the area.  That risk is eating into the houses' market value.  If that risk comes home to roost, and it does from time to time, your "good deal" turned into a fair deal and a big headache - or worse. If, however, the risk is managed successfully (or eliminated), you can build equity and make a profit through foreclosure purchases.  

 

Myth #2 - If it's been on the market for a while, there must be something wrong with it.  

 

Generally, this one is totally false.  Usually, what was "wrong" with it is that the seller's had an overinflated idea of what their home would fetch on the open market, and had trouble reconciling reality with the price. A $400K house that's on the market for $500K isn't going to sell for a long time. An easier way to find properties that have problems, is to look for properties that look "too cheap" relative to the overall market.  They will probably have lots of issues. But length of time on market is not a slam dunk to assume that the property has a problem.  After all, most homes that have big issues usually get them fixed sooner or later.  And very, very few of those issues get through a competent inspection.

 

Myth #3 - It's good to have lots of land.

 

This one has really changed today.  There are lots of buyers - and I mean lots of em - that look at an acre of land and see their whole Saturday up in smoke.  Lots of buyers prefer to have small, but functioning lots, that work for their lives.  So, land is not a slam-dunk, and you shouldn't pay "extra" for it.  Although many sellers, who bought the property and were convinced that their large lots would one day bring riches, may ask you to do just that.

 

Myth #4 - Never buy the biggest home in the neighborhood.

 

Why not?  I hear this one all the time, and it always gives me a chuckle.  Let's say you have a neighborhood of new, very similar 600K homes.  Now let's say that the biggest home in the neighborhood was priced at 400K.  Would you buy it? Of course!  So it's not really about whether to buy it, it's about what it's worth.  It is true that if a significantly larger home is in a neighborhood of smaller homes, that home's sale price is likely to be lower than if it was in a neighborhood of similar homes.  But not by as much as you'd think.  And it's certainly no reason to eliminate a nice house, if you happen to find one you like with this situation.

 

Myth #5 - Price per square foot will tell you if you're getting a good deal.

If only it was so easy!!!  Price per square foot is an important metric.  But a better metric is price per USABLE square foot, and you won't find that on the public record.  I won't bother to tell you that every home out there could have floor plan issues, such as tandem bedrooms, family rooms that are too small, hallways in the wrong place and homes without mudrooms.  But they can and do.  And even if buyers can't quantify it in numbers, I'm here to say that they vote with their wallets, and homes that have non-useful floor plans look cheap at first glance.  Till you get in them, of course, and realize the issues when you're inside.

 

Myth #6 - It's a house- so any upgrades that I do will pay for themselves when I sell it.

 

Most people do improve the values of the homes they buy by upgrading them, or doing improvments.  But there's no guarantee that's going to work. I have seen people do very expensive improvements that were poor equity builders. Finished basements, pools, tandem rooms, "extra" bathrooms, roofs, and all sorts of other improvments can be far more expensive for you than what the market will bear for such items. A pool is a classic example: putting a pool in could cost $15-25,000, pretty easily, by the time you get done with the pool, the surround, and the fence. But the home is now worth little more than it was when you started.