Valuation differences. Real Estate Investment VS. Buying a home.

Real Estate Investment VS. Buying a home.

Different values for different purposes.

Todays article was inspired (yet again) by my participation in open forums where people discuss real estate. On this particular forum the majority of users are property investors and people buying or selling homes…and Realtors are few and far between, but that is an unnecessary digression. At any rate, one of the home buyers was trying to understand some issues with his appraisal and one of the investors made a very poignant point. All he said was most of the things that buyers buy homes for have nothing to do with their investment value.

Most of the things that buyers buy homes for have nothing to do with their investment value.

Try and get your head around that for a minute. No, don’t fight it. I did mental gymnastics around this idea for half a day after reading it, and he is mostly right. So here is the outcome of my mental gymnastics. The only thing that matters from an investment standpoint is ARV (after repair value) minus (purchase cost+ repair cost). That’s it. On the other side of the coin; while money does provide some limits, people buy a home because it FEELS like a home.

As we dig deeper into this thought, we have to start where the two types of buyers agree. The most obvious answer in this area is the first, second, and third rule of real estate. Location, location, and location. But even here, there are differences in what the two are looking for.

For instance. The investor looks at location, and wants to know what part of the growth and gentrification cycle the property is in.

New neighborhoods can provide value if the investor can locate a foreclosure that doesn’t have any real damage, but enough cosmetic damage to keep the bank from fixing it and at the same time be too much for most retail buyers to want to look.

Mature neighborhoods at the top of their value arc have little to offer investors, unless of course someone wants to unload a home under value… in which case one is sure to swoop in and buy it for a flip or rental property.

Neighborhoods in decline are similar to mature neighborhoods to an investor, with the caveat of the purchases being more frequently for the purposes of renting than flipping.

Once a neighborhood has seen its property values bottom out and the artists have moved in (signaling the beginning of the gentrification cycle), the investors come onto the scene full force. At this point they know the values will be moving up and they become very aggressive.

During the time period between that bottom and the neighborhood reaching maturity, the activity will move away from the investors and back towards retail buyers and sellers.

Seeing that description, my more astute readers will see when the retail home buyers are most active.

They will also realize how stark the difference between investor and homebuyer values is. Retail buyers purchase their homes in new neighborhoods, mature ones, and up and coming neighborhoods (after enough investment has mitigated substantial amounts of risk). For them it is not about maximizing their dollar. It is about having a home where there are neighborhood amenities, and they feel safe.

Like I said, this article was just something that I wanted to talk a little about because I found that one sentence to be so telling… so I won’t bore you will tons of details about those differences. The ones we went over illustrate the difference between property investors and home buyers values pretty clearly.

I will take a minute to point out though… doesn’t this series of thought make it clear that when buying a home, a real estate investor is possibly the worst place you could get home buying advice? Their values are completely different than yours.  So where do you get good home buying advice? From a Realtor of course!

So if you want solid home buying advice from someone who understands YOUR values and how to fulfill them, call Robb at 317-657-8059 or email to set you free / no obligation home buyers consultation.

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About Robb

A husband, Dad to 5, and Grandpa to 9. US Navy Vet. 18 Year Postal Employee turned full time Realtor. I enjoy a wide variety of things, but you will find that here I mostly write about Indianapolis, government/politics, recent news, and whatever book I am reading or have just finished at the moment.
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