OfflineMore news articles hit every day telling us about bidding wars on homes, especially foreclosures. It isn’t just about price wars either, as many buyers are waiving inspections as a tactic to win a property. Earlier this year, the real estate company Redfin reported that 76% of buyers surveyed reported that they faced competition in the purchase of a home.
There has been a cooling off during the middle of the year, primarily due to rising interest rates that turned off many retail buyers. However, either rates will come down for a while or people will assume they may continue to rise, and they will come back to the market. Competition is extreme between investors and greater than normal between retail buyers.
One headline is all about investors cashing out equity in other properties to jump into what they perceive as a hot market with fast profits available. This is really prevalent in California. With many waiving inspections to entice the seller to take their deal, there are already stories of reality checks for these buyers when they find a pile of unexpected repair bills.
The question many are asking is if we’re seeing the expansion of a bubble again. Especially in the California market, but also out there in many other areas, people who know little about real estate investment are cashing out stocks and bonds and jumping on properties they believe will rent and cash flow well. Many aren’t educated enough about real estate investment to make a wise decision, and that’s compounded when there are repair issues and they must hire out all work.
Lenders are beginning to show signs of a “bubble mentality” as well. They’re seeing money flowing into housing and bringing back alternative mortgages in some areas. They’re not really assessing the knowledge of the buyer about rental property management and valuation. If it appraises, they’ll finance it.
Bubble or not, the educated real estate investor shouldn’t be concerned. Careful valuation practices and knowing your local rental market should allow the investor to sit back and bank their cash flow and enjoy the bubble show.
Thank you for this advice! I'm a California based student, newly turned investor. The shift in market is exciting. And yet, California's "competitive market" and very high dollar transactions sometimes seem intimidating to me.
The education and information here on DG is a godsend for new real estate guys like me.
Lawrence Shine
Green Cottage Properties
www.greencottagproperties.com
San Francisco, CA 94105
[email protected]
1-888-965-9933
415-439-0483
I do not think that the market activity and price increases is creating a bubble. Price have not yet reached the peak levels of 2008. Until that happens, I believe that the market is simply restoring itself and rapid price increases are bound to happen.
As to the price increases caused by bidding wars, one safety against over-inflation of property values is that a lender will only write a loan on the appraised value or the purchase price - which ever is less. If the purchase price exceeds the appraised value, the buyer must personally fund the difference. This is a hedge against any bubble.