When to Buy a House, and When Not To
I started off this series by suggesting there are ideal times to buy real estate and extremely silly times to buy. The financial implications of getting the timing wrong can be suicidal. In a later blog I will show you what to look out for in order to get things right, but today I am only concerned to show how you can make quite a killing when you do get it right.
Let me take you back to 1988. If any of you were following me way back then you will no doubt have read my articles at the time on house prices with a certain amount of disbelief.
My college friend, Jerome Lee, had recently inherited his mother’s home in Hastings. I rang him up one day and suggested he put it up for sale.
“But house prices are rising,” he said. “I’m not selling now.”
“You dont have to sell just now, but put it on the market and see how things go.”
It took me about three months to persuade him to sell. He completed the sale in the autumn.
Even then Jerry was still concerned that he had sold too soon, and every week he rang up the local estate agents to see how the market was going.
Two weeks after his sale he rang me. “I’ve just been ringing round the agents asking about house prices. Apparently they cant understand it. Things have gone very quiet.”
And that was the beginning of the crash.
I cant do an anatomy of a crash. Those of who know when to get out can somehow smell it in the wind. But here are a couple of indicators.
First: the market has to be super-strong. Everyone needs to be bullish. That means there’s almost nobody left to buy.
Second: Prices have to have raced ahead, and become over-extended. There are levels at which this tips over and the word unsustainable comes into play. The figures vary depending on where you are in the UK. I give figures in my book: The Ultimate Real Estate Guide. This book covers everything you need to know about how house prices get the way they do. You can buy a copy of the book from Amazon. Here’s the link: https://www.amazon.co.uk/dp/B07D3ZW8D2
When those figures are hit it becomes impossible for people to bid prices up any higher. In short, buyers run out of money. Only two things are then possible, big wage rises are on the cards and the price carousel keeps ramping up higher, or the economy starts to totter. That leads to a hiatus in the buying, followed by a kind of silence. That is the sound of reality creeping up on the over-exuberant and over-extended purchasers. Probably about six months later the sales start. Early sales lead to price cuts, which lead to more sales, and more cuts, and the whole mess begins to unwind.
At some stage we hit bottom, and there is that eerie silence again. The panic is over, and the wounded are hiding and licking their financial wounds. Those who see opportunity are waiting to see if this is the real bottom. Generally those vultures (myself included) see the great opportunity, but we know that we probably have about two years at the bottom before any significant number of buyers will venture back into the market. But that is precisely when you can pick up the best deals.
Can we formulate some rules for all of this?
If you are an investor there are basic rules which you always follow. I repeat: always.
You know that profits are made when you buy, not when you sell. To make real profits you have to buy when there is blood in the streets. You dont wait for the rebound to get comfortably under way. You buy when things are bad but can only get better, not when they’ve already got better.
The average hopeless investor buys when things look rosy and sells when they look bad. The smart-arse buys when just about everything has hit the fan, and sells when things have gotten unrealistically rosy.
In my book I give copious examples of the deals I did back in the nineties.
Let me just give a couple of examples here.
I bought a flat in Warrior Square in St Leonards for £10,000. Another in Marina for £20,000. That latter flat had three bedrooms, was right on the sea front, was fully furnished, and had been bought three years earlier for £47,000.
Look at the maths. If it had been worth more than twice its selling price just a few years earlier there was a great chance that figure would be hit in the future when the general market recovered.
There was also the business valuation of the properties, but I will go into that metric next week. After all, you do know how to value a house, dont you?
Yes, I know, silly question. You haven’t a clue, have you? But it’s really very easy, and the last thing you do is ask an estate agent. As Oscar Wilde wittily pointed out, an idiot can always tell you the price of something, but that doesn’t mean he knows its value.
There was one street back in Hastings where there were more houses for sale than those which were still occupied. I went to look at one which was priced less than half of what it had been at the height of the boom. The agents wanted £20,000.
The first thing I did was check the number of houses in the street. Then I counted the For Sale boards. I then went back to the office and offered the agent £8,000. There was a silence which lasted close to three minutes. Eventually a very sad voice said “You cant raise that to £10,000, can you?”
We finalised the sale at the mid point.
That’s when you buy. When everybody else is feeling they’ve been stung, or they are frightened of being stung. Interest rates are probably high. Prices are on the floor. The economy is not looking good, but the deal is.
Think about it. If mortgage rates are high but falling. (Being high is not necessarily the time to buy. They must be edging down.) That means you can probably look forward to them getting less with time. As they are high, most people will not be buying just yet, so you have the pick of the market. But, once again, think about it.
Say you buy a property for £50,000 when interest rates are at 10%. That house was recently valued at £100,000. You are in essence buying a £100,000 house at half price. Put that another way. The sales are on. Why wait till the price rises to £75,000 and the interest rate has come down to 7%? Do the maths. What does that second price do to your potential profit? You’ve immediately lost no less than half your possible profit. That’s just plain silly.
But if you know that house prices have become unsustainable (I mentioned my indicator earlier in this article), and that the economy is headed down, and interest rates could be on the way up, you know that it’s probably a good idea to sell, bank a good price, start to rent till the disaster is over, and then get back in to the market at a lower price.
That was the advice I gave my grandson Jamie four or five years ago. You can probably guess what he did. He went out and bought a house. He paid too much, so now he is paying more each month for a loan that was too high in the first place.
Okay, but how do you value any deal? In short, how do you know how to do the maths?
I’ll tell you next week. Or, at least, I’ll give you a few basics. The full set of figures is always available in my book.: https://www.amazon.co.uk/dp/B07D3ZW8D2
That book contains so much information it will save you tens of thousands.