Photo: Steve Martel
Home prices have declined by more than 33 percent from their July 2006 peak, foreclosures may be set to rise again and the economy just isn’t providing a lot of hope that the “good old days” of high home prices will be back anytime soon, leaving many potential home buyers on the sidelines hoping for better times ahead.
Except for 14-year-old Willow Tufano. In March, the young teen made news by buying a house with cash in Port Charlotte, FL for $12,000. And the bold move wasn’t just youthful naivete — this business-savvy girl knows what she’s doing (even if the laws in Florida meant she had to buy the home through her mother).
7 Tips on Buying a House
So why was Tufano interested in buying a house after foreclosure challenges caused other buyers to flee? As it turns out, the answer can teach potential home buyers a lot about the real estate and mortgage market. These seven tips on buying a house may just help you become a successful home buyer.
1. There are Places to Profit in Every Market
Among the tips on buying a house that Tufano demonstrates is that a bad market can often provide good opportunities for savvy buyers.
Tufano’s two-bedroom, one-bathroom home last sold for $28,500 and was valued at as much as $85,000 at the market’s peak. Many would see this decline in value as a drawback, but when a property falls this far, it becomes a lower risk purchase, both because the outlay is so small and because the price has fallen so far it probably doesn’t have much farther to go.
It’s impossible to predict a housing market bottom, but those who buy in near it — especially those buying a home with cash — stand to profit the most when that market turns around.
2. Choose a Good Neighborhood, Not a Good House
The home Tufano purchased isn’t exactly a dream home, but when it comes to buying property, it’s often the kind of house that has the most potential for profit. As long as a home is structurally sound, one of the most important things to look for when buying a house is its location.
In 2009, CNN picked Port Charlotte as one of the top places to retire thanks to its miles of protected shoreline, strong arts community and excellent medical facilities. In other words, while this house might be a little ugly, its location has a lot going for it.
Real estate agents often harp on the old adage “location, location, location.” That’s because homes can be repaired and updated, but where they stand is permanent. If appreciation is your motive, location should be your prime consideration.
3. Be Willing to Put in Sweat Equity
Buying the worst starter home in a nice area has its advantages, but profiting from it also requires some sweat equity. Tufano’s home was dirty, run down and filled with debris. It cost $15,000 to paint and clean up the home, much of which was done by Tufano and her family.
Many buyers turn away from a property that needs work — big mistake. Buyers who are willing to roll up their sleeves often get a discount that’s worth a lot more than the cost of the work the home requires.
4. Consider a Short Sale
Tufano’s home was a short sale, an alternative that may be offered to distressed homeowners instead of a foreclosure. For buyers, a short sale can be a way to buy a home at a discount because the bank that is financing the property is looking to wrap up the mess and cut its losses as quickly as possible. Plus, the lender is eager to continue to get paid the money it loaned out, so it may also offer favorable financing terms for the new owner.
For those who do their research and work with an experienced real estate agent or attorney, there are great opportunities among these distressed properties.
5. Buy a Home With Cash
It appears that the Tufanos decided that buying a house with cash was the best option. This is clearly much easier with a $12,000 home, but even home buyers who must go through a mortgage lender should put down as much as they can.
In many cases, interest charges on a home mortgage add thousands of dollars to the overall cost of the home. The less you borrow, the cheaper your home will be.
6. Look for Cash Flow
After cleaning up the home, Tufano rented it out to a couple for $700 per month. That means positive cash flow right off the bat, giving Tufano the freedom to hold the home until it appreciates, at which time she may want to sell.
Even for those who are buying a home as a primary residence, very low mortgage payments provide a similar benefit by making it easier for owners to build equity and pay off the home faster.
7. Remember the Value of Time
The current U.S. housing market has too much supply to really profit from short-term housing “flips.” And while there’s no telling how long the housing crisis will last, Tufano’s long-term approach sets her up for success.
By renting out her house, she has the flexibility to wait for the market to recover and eventually sell her property for a profit. Sometimes short-term profits are an option, but in most cases, being open to the possibility of hanging on for the long-run is a smart move when buying a house after foreclosure.
Legendary stock investor Warren Buffett once famously said that investors should be fearful when others are greedy and greedy when others are fearful. It looks like Willow Tufano lives by a similar motto, as what others call a crisis may turn out to be her cash cow.