Reno Investors: When Buying A Home, Avoid Averaging Down

 Downtown Reno:  Corner West and 1st St.

Note: This post is targeted at investors.  Other type of buyers have different needs.  Homeowners, especially first time home buyers, are a different breed just because they would live in the house for at least five years.  But it won't hurt you to also have an "investor's point of view".  Hope it helps..

Average down: The process of buying a property at a lower price than you originally purchased. This brings the average price you've paid for all your other properties down.

I also define it as as having premature hope that the real estate market has already reached a bottom. In effect saying, "the market can't go any lower."

In 2008, two years after the Reno real estate market started to go down, two of my close friends decided it was time to invest in the Reno market. With the help of an investor, they bought six homes in Reno and Sparks priced between $200,000-$270,000.

They offered these homes as a rent-to-own program to potential home owners who couldn't buy a home because of bad credit. They reasoned that after five years (around 2012) they would hit the jackpot through the equity of the six homes which will have a "sure" buyer through the rent-to-own program (their current renters who'll turn buyers).

I told them of three potential problems (click on the graphs below to enlarge):

1.  The Reno-Sparks real estate market hasn't reached a bottom and it was clear that it was still going to go down.

Reno Homes Median Price 2007-2009 (graph below):

I showed them this graph--the average home in Reno was still falling, fast.  I asked them why not wait another year or two to see what happens in the market.  And if they wait, and prices fall, their mortgage would go down and they could also pull the rent down, thereby attracting more renters who would more likely afford the homes when they're ready to buy. I told them their strategy was solid, but the timing and execution was not good.  They told me that their strategy was for the "long haul" and they would weather the storm and that the market was not far from reaching a bottom.

Reno Homes Sold (demand) Dec 2008:

Demand, on average, was still going down.  I also remember back in 2008, people already felt the sting of the real estate market downfall.  Media was already reporting massive real estate problems happening all over the Country.  Fear was prevalent. 

My friends told me that the time to invest was when people were fearful.  Reiterating that this was "the time".  I understod where they were coming from--"buy-when-it's-not-popular-contrarian thinking".  This was the hard argument to reason with them, because in their eyes I sounded like the "negative doomsayer".  And that they were warned by their investor gurus that people would actually discourage them from investing and pursuing their dreams.  I told them that I'm just showing the facts to them and ultimately, I would respect their decision.

Reno Homes Supply:

Inventory of homes in Reno was down as well.  Many sellers were not confident in putting their homes in the market.  They were afraid to cut down their losses. Instead, they reasoned that the market will eventually bounce back and they can sell their homes back to 2005 levels. 

A classic example of a real estate depression is when buyers AND sellers are afraid.  Little activity in the market. 

2.  Foreclosures in Reno-Sparks were just starting:

As you can see in the graph,  Reno foreclosures significantly went up at the start of 2008.  This was the result of the rapid decline of homes that started in mid 2005.  More and more home owners struggled with paying their mortgage.  They started to miss on their payments, and at that time many people were still not properly informed about short sales.  Many just foreclosed.  This in effect pulled down the prices of homes in their respective neighborhoods.  Those were very uncertain times. 

 Once foreclosure goes up, median prices of homes goes down...

3.  Banks did not want to lend money.

As the financial turmoil were starting in 2008 (Bear Sterns going through a "crisis of confidence"),with the public's perception on banks at an all time low, sub prime mortgages continued to ravish the economy---most financial institutions decided to stand pat on their cash.  People were afraid.  Banks, more so. It was tough to get a loan that wasn't FHA.

As a disclaimer, there have been times in the past where I prematurely called a market bottom.  I called a bottom for the price range of under $200,000 more than a year ago, primarily because the numbers and demand for Reno homes were showing consistent positive signs. To my surprise, many homes still are going down even though demand is already up even in the starter home market.  Which just proves that we can't be smarter than the market--avoid averaging down. 

Does that mean that all home buyers should just completely ignore the market until a bottom is reached? No.  Every buyer has different needs and ultimately your role is to know the real estate facts and from there you can decide what's best for you and your family.  My job is to show you what's happening in the market--to show you the truth.

Just last summer, my sister in law asked me if it's a good time to buy.  Their budget was $120,000.  At this price, their monthly mortgage would be $900.  Their rent at that time was $675 for a one bedroom apartment.  We looked at some homes up North and they found a gorgeous 3-bedroom home that was still available at their desired price.  It had $20,000 worth of upgrades with a beautiful back yard, covered patio.  I told them this was their home. 

They knew that home prices may still go down but because they could afford the monthly mortgage and that they also wanted to move to a home (they had a 3 yr. old son and planned on having another baby), and planned on staying at the house for at least 10 years, not to mention the $8,000 tax credit.  I told them this was a good decision. 

They've been there going six months.  So far so good.  Two weeks ago, they received the $8,000 dollar check =).