If there is a tragic death in the property, there's a good chance the value of your property will trade at a discount. If there is a death by natural causes, the property will likely trade at market price or a slight discount. This post comes up with a guideline on how much a property is worth after a death in the residence.
Discovering A Nice House, But With A Death Inside
On one of my winter open house rounds I stumbled upon a beautifully renovated Edwardian with three bedrooms and two bathrooms on the top floor, a full bathroom on the first floor, and a bonus room on the bottom floor. It looked a lot like my rental house I sold this summer, but brand new.
At 2,500 sqft, I thought the house would list for ~$1.8M and sell for closer to $2M. But instead, it was listed for $1.49M and had been on the market for several months already. I immediately wanted to buy the place given the ~$500,000 pricing discount.
Upon further investigation, however, I learned from the new listing agent there was a terrible fire back in September 2013, hence the gut remodel. That's fine so long as the new construction is done to code with permits.
But then the listing agent went on to tell me there was not one, but three deaths as the result of the fire: a 33-year old father, his one year old daughter, and her grandfather.
As a new father, my heart sank to the deepest depths of the ocean. I could not imagine losing my son so early. My only wish for the Grim Reaper is that my son outlives both his mom and me, 25 years from now.
Value Of A Property After There's A Death Inside
Even with a 20%+ discount to fair market value, I would never buy a home that experienced such tragedy. Call it superstition, but I would always wonder whether their ghosts would haunt us because we had taken over their home. Maybe the house is cursed and would consume all of us in the future as well with a new fire.
When the firefighters got there at 1:30am, they said all the fire alarms were blaring. I'd like to think that if I smelled fire and heard the alarms, I would have the calmness to wake up my wife, pick up my baby, and walk 20 feet out the door.
Even if a fire was blocking my way, I'd walk through the flames protecting my little one knowing that short-term burns would be better than death. But such disasters often happen too quickly to react.
Death In A Rental Property Is More Acceptable To Renters And Investors
The only way I would ever consider buying a property with such a tragedy, even at a steep discount is if it was for a rental or a real estate crowdfunding investment.
In San Francisco, you have to disclose if there has been a death on the property within the past three years. The owners waited until the fourth year to list, which may or may not have been on purpose. But as a landlord, you don't have to disclose, but you probably should just in case.
As a buyer, you most go through the seller's disclosure statements thoroughly. Ask questions and know what to look for. A death in the house should be part of the disclosure package.
In the end, I decided even if the property was free I wouldn't be willing to own the home. It would be like owning a dog that mauled to death three children. The constant association with such a tragedy would be too difficult to bear.
Other Types Of Deaths In A Property
Now that we know the value of a property declines if there's a death on the premises, the next analysis is to see where there's a difference between the types of deaths and its negative affect on a property's value.
Based on my research, it seems like the average discount to market for a tragic death on the property is somewhere between 15% – 25% in America. Tragic deaths include: homicide, suicide, death by fire, death by electrocution, death by falling.
For nontragic deaths, the discount is anywhere from 0% – 10%. Nontragic death is considered death by a natural cause e.g. old age, organ failure, disease.
If you are a home buyer, let me offer up a guide to how much of a discount you should argue for during negotiations if you are OK with buying a property that experienced a death. It's always good to anchor low in the beginning and move towards the middle.
The key factors after death that will affect the discount to market are time, whether the property will be purchased as a primary residence or rental, and the way in which the property is bought.
Finally, perhaps there's an arbitrage opportunity for buying new construction homes in places that are extremely superstitious about home deaths or areas with a much older demographic.
One Positive Death Scenario To Consider When Buying
There is one positive death scenario to consider that may increase the value of the house. If an owner dies of a natural, peaceful death at a very late age, a buyer may see the house as having a wonderful spirit.
For example, let's say the owner died in the house at age 105. Given the median life expectancy is only about 80 in America, a house that allowed someone to live 31% longer than the median life expectancy could be seen as having wonderful feng shui or life-giving powers.
The older one gets, the more one appreciates time. Owning a house that generates wonderful memories is a blessing. As a result, buyers from such cultures would be willing to pay a premium.
Let's embrace everyday as if it were our last.
Recommendation For Real Estate Investors
If you don't have the downpayment to buy a property, don't want to deal with the hassle of managing real estate, or don't want to tie up your liquidity in physical real estate, take a look at Fundrise. Fundrise is one of the largest real estate crowdsourcing companies today.
Real estate is a key component of a diversified portfolio. Real estate crowdsourcing allows you to be more flexible in your real estate investments by investing beyond just where you live for the best returns possible. For example, cap rates are around 3% in San Francisco and New York City, but over 10% in the Midwest if you're looking for strictly investing income returns.
I'ver personally invested $810,000 in private real estate funds to diversify and invest in lower-cost areas of the country. The demographic shift to the Sunbelt is a long-term trend.
The Value Of A Property After A Death is a Financial Samurai original post. All rights reserved.