Buying a house can be nerve-wracking and complicated. So when is it safe to buy a house? There are a minimum of 5 things you need to have first that are explained below. A house will likely be the biggest purchase of your life. So you want to make sure you're ready.
A lot of people lost their homes during the 2008-2009 financial crisis because they were over-leveraged, had ballooning mortgage payments, and simply bought at the wrong time. Thus, you may have a lot of uncertainties and wonder when is it safe to buy a house.
There are many variables that determine the current and future value of a property. These include, but are not limited to location, marketing prowess, seasonality, condition, curb appeal, surrounding noise, interest rates, job environment, tax laws, housing laws, and demographic trends.
But all of these variables are derivative variables that leave a lot of wiggle room for price interpretation. For example, a decline in mortgage interest rates tends to boost home prices because borrowers can afford more home. But exactly how much home prices will increase when mortgage rates decline is murky.
A property is only as valuable as what someone is willing to pay. Therefore, I've come up with a new property leading indicator that if used properly, could save and make you a lot of money down the road.
By way of background, I've been investing in real estate aggressively since the 1990s in cities such as Honolulu, San Francisco, and Lake Tahoe. Further, I have $810,000 invested in 17 different commercial real estate projects around the country in real estate crowdfunding, which I'll talk more about in the end.
When Is It Safe To Buy A House?
In general, a potential homebuyer should have the following to feel it's safe to buy a house.
- At least 20% down for a home
- A buffer equal to 10% of the value of the home in cash or semi-liquid securities
- A stable job
- A strong believe you will live or own the house for at least five years, and preferable 10+ years
- Spend no more than 30% of your gross income on the total cost of owning the home
If you've got these conditions down, you should be in good shape and feel safe to buy a house. You might not make a lot of money on your house. But perhaps that's OK since you view a house as a home first.
I argue that if you're going to buy a house and spend the most money you've ever spent on something, then you absolutely should try to make a positive return. All risk should have a reward. And when you take out debt, there's always risk involved.
Here is a key signal that you should look for before buying a house:
When a home's final sales prices is at least 20% higher than the online estimate in the neighborhood you want to buy.
I call this the FS20 Property Signal. 20 stands for 20% and FS stands for Financial Samurai. Using FS20 can help you feel safe to buy a house.
Every real estate buyer by now should be using technology to look for homes online. My favorite platform is Redfin because they have a mission of lowering transaction costs.
The higher the final sales price in comparison to the online estimate, the stronger the demand. Up to a 20% price differential can account for things such as online data error and not taking into account the proper condition of the home. Further, some homeowners are willing to fudge their home's features to try and improve their online home estimate.
Although online real estate firms like Redfin and Zillow use their thousands of data points to create property price estimates and forecasts, when a final sales price is at least 20% higher, it is clear Redfin and Zillow have not properly caught up to the real-time demand that is surging ahead.
Remember, all these other signals like interest rates, demographic trends, the stock market, and so forth are pertinent towards making a good judgement call about where property prices will go. However, there is no more powerful a signal than see what the final sales price is of a comparable home to give you the confidence to buy.
Let's look at two examples of where the FS20 Property Signal goes off and you can feel safe to buy a house.
When You Know It's Safe To Buy A House
331 Vicente is a lovely remodeled, three-bedroom, three-bathroom, 2,400 sqft home in San Francisco's West Portal district. The home is an easy 5-minute walk to the MUNI station, which will bring you downtown in about 20-25 minutes.
Given the neighborhood and high quality of the remodel two years prior to sale, one could make a reasonable assumption that 331 Vicente should trade for about $1,000/sqft, or $2.4 million.
Once you hit $1,000/sqft in San Francisco, you've reached the “mass luxury” segment of the residential property market. 10+ years ago, only properties on the north side of the city like Pacific Heights would command $1,000/sqft or more.
The real estate agents were smart and listed the house for $1.995 million ($831/sqft) to attract the largest amount of potential buyers to the property.
If the property sold for between $2.1 million – $2.4 million, the vast majority of observers would see this as a reasonable transaction. Now guess what the property finally sold for.
The house ended up selling for a whopping $2.9 million! That's $762,800 or 36% above Redfin's estimate, and $600,000 higher than a reasonable final guesstimate price. The FS20 Property Signal just went off big time!
Analyze Home Sales To See If It's Safe To Buy A House
Getting $1,208/sqft on a 3,014 sqft lot with no view is an extraordinarily high price for the West Portal neighborhood (District 4). The data below from MLS and Compass Brokerage has the average price/sqft at $824 for the West Portal neighborhood (D4).
Therefore, this house got a 47% premium to the average price. This is a sure sign that prices are moving higher.
Below is a chart that highlights where Redfin estimated 331 Vicente at a reasonable $2,137,200 and where it finally sold. This huge gap is the buyer's opportunity.
An enlightened buyer should consider looking in the West Portal neighborhood ASAP for similarly remodeled homes in similar locations close to the average price/sqft of $824 and bid accordingly. No seller will see a bid based on the average price/sqft as unreasonable.
Given the homebuyer has wiggle room up to $1,200/sqft based on this sold comparable, he could potentially bid up to $1,000 – $1,100/sqft for a similar property to make himself really competitive.
The data that comes out from the Multiple Listing Service is always lagging. Hawk-eye buyers have about a 1-2 month window to take advantage of the lagging data before the new data feeds into the system and prices recalibrate.
But even when this $2.9 million price point gets entered, it may not significantly move the needle because it would be just one sale out of perhaps 15 – 20 for the previous quarter.
Therefore, buyers will likely have a 1-4 month window to take advantage and bid with confidence before the computers and people reset the true value of the neighborhood.
Use the MLS data as ammo to offer prices closer to the average, while knowing that the real trend is pushing prices higher!
The Property Buying Signal At Work
Let's look at another example of the FS20 Property Buying Signal at work with 30 Fanning Way is a quaint two-bedroom, one-bathroom, 1,288 sqft single family home in San Francisco's Golden Gate Height's district.
30 Fanning Way has ocean views, which I think is one of the most attractive attributes of any home in San Francisco. The upside potential for ocean view homes is the highest.
Besides having an ocean view, the home has an oversized lot of 5,584 sqft, which is slightly more than double the standard 2,500 sqft lot in San Francisco. Unfortunately, at least half the lot is on an unusable hill.
The negatives of the house are that it's small on the inside and the kitchen and bathroom were probably remodeled 20+ years ago. Any buyer would probably remodel the kitchen immediately after purchase, or definitely within the next 5-10 years to the tune of $30,000 – $50,000 for the kitchen and $15,000 – $30,000 for the bathroom.
The house is fine for one kid, but it's going to be problematic if you decide to have two. Babies cry constantly for the first 1-2 years of life, and not having the space for the rest of the family to relax is going to be a little miserable. Finally, if you have a kid and want to have guests, someone is probably going to sleep in the living room.
Given we know that Golden Gate Heights (District 2) has an average selling price of $932/sqft according to the latest MLS data, we can estimate that 30 Fanning Way is worth about $1.2 million at 1,288/sqft. The condition of the house is average.
But given the oversized lot and views, 30 Fanning Way should trade at a premium. Also, smaller homes tend to trade for higher price/sqft. Therefore, let's bump up the estimated price per square foot to $1,100, or an 18% premium to the average price/sqft of the district of $932/sqft.
At $1,100/sqft, we can value 30 Fanning Way at $1,416,800. Let's just round up to $1,500,000, or $1,164/sqft.
The selling agent decided to price the home at a peculiar $1,168,000 or an attractive $906/sqft, $26/sqft below the average. Meanwhile, Redfin decided to estimate the home's value at $1,504,000.
What did the property finally sell for? An incredible $1,855,000, or 59% over asking and 23% over Redfin's estimate! See below.
Given the final sales price was 23% higher than the online estimate, the FS20 Property Signal went off. Therefore, if you're looking around in the Golden Gate Heights neighborhood for a single family home, you've got a 1-4 month window to find something close to the average price/sqft before the entire average shifts higher.
You can probably comfortably bid up to $1,000/sqft for a similar type of home, knowing you've got a $440/sqft buffer thanks to 30 Fanning Way. And if you're really bullish, perhaps you can go up to $1,100/sqft to match the online estimates.
I definitely wouldn't pay a similar record high price as 30 Fanning Way because that would defeat the purpose of the FS20 Property Indicator. You always want to buy property knowing you have some type of price buffer or potential to expand in order to create more value.
Each home is different, so it's really up to you to decide how much you're willing to risk. Every potential homebuyer must kick some sheet rock and go visit each house during an open house or private tour to make sure the online estimates match up to reality.
Often times, there are things such as areas for expansion or details online listings fail to capture. The more uncaptured opportunities you can find, the better.
Related: How Big Of A Mortgage Should I Get?
Property Buying Signals Are Everywhere
Be as diligent at researching your next house purchase as you are for preparing for a job interview, applying to college, choosing a spouse and so forth. A house will likely be your biggest purchase in your lifetime.
The FS20 Property Signal can also be the FS10 Property Signal if you live in a more normal housing market. It could even come down to FS5 if you can get many examples of properties going 5% over its online estimate.
Real estate is my favorite asset class to build wealth. And if you aren't ready to buy a house yet, consider real estate crowdfunding to get strategic exposure to real estate without having to come up with a 20% downpayment and deal with maintenance issues and tenants, if you become a landlord.
The best real estate crowdfunding platforms today are:
1) CrowdStreet is based in Portland and connects accredited investors with a broad range of debt and equity commercial real estate investments. CrowdStreet is great because they focus primarily on 18-hour cities (secondary cities) with lower valuations, higher net rental yields, and potentially higher growth.
2) Fundrise, founded in 2012 and available for accredited investors and non-accredited investors. I’ve worked with Fundrise since the beginning, and they’ve consistently impressed me with their innovation. They are pioneers of the eREIT product. Most recently, they were the first ones to launch an Opportunity Fund in the real estate crowdfunding space to take advantage of new tax laws.
Both of these platforms are the oldest and largest real estate crowdfunding platforms today. They have the best marketplaces and the strongest underwriting of deals. Sign up and take a look around as it’s free.
You can more surgically invest in different types of real estate and different regions around the country. Personally, I'm investing in the heartland of America where valuations are lower and net rental yields are higher since most of my real estate portfolio is in the expensive coasts.
Good luck with your house purchase or real estate investments. Always buy with a pricing buffer. As with all investments, there is risk. And your goal is to make as much money as possible in a risk-adjusted manner.
My real estate crowdfunding dashboard below.