When searching for a home to purchase, you may be tempted to buy “hot” real estate. This is real estate in an area where the value of a home is extremely high. Often, we are tempted by these scenarios because many home owners in these areas bought there homes just a few years before the “boom” and are benefiting. This means that they are now going to be able to sell at a substantially higher amount than what they had initially paid for their homes. Looking for the same kind of break, and who isn’t , you will likely be drawn to purchasing a home there as well. However, be aware of the trap that often ensues.
Real estate price spikes can happen for many reasons, and one is because of a population boom. This is common in areas that are near military bases, colleges, and major, growing industries. Anything that causes a house shortage will in turn create higher real estate prices. Why? Because home owners know that the competition provides a way for them to jack up their home prices and make a larger profit. Competition is a home owner’s best friend, as it ensures that there will be plenty of bargaining and pleading going on for a decent home. If the situation is especially desperate, real estate prices will sky rocket. In much the same way that a produce item that has had a bad harvest year will be more expensive in the grocery store because of limited supplies, homes will increase in value if they are in an over crowded area.
How do you spot a real estate trap? The best thing to do is research the area that you are considering. Just how much have prices increases in the past five years? Usually, a 1%-10% increase is not a problem. However, if the increase has been extremely high, say around 35-45%, this should be a red flag. What made the prices of these houses go up so quickly? Take a look at the local records and try to determine if a major population increase has taken place during the time that the real estate prices sky rocketed. If so, be aware that as more houses are built, there will be less competition, and the price of your home will decrease. If you are determined to buy a home in this particular area, it would be best to wait until real estate prices level off to ensure that you do not become a victim of a home buying money trap.
When is it safe to buy hot real estate? Usually, you can safely bet on areas where the real estate prices have been increasing steadily, rather than rapidly, over a span of several years. Higher tourism interest, increased advertisement of an area, and several other factors can contribute to what makes an area desirable for home buyers. Make sure to look at the real estate pricing trends in that area for the last ten years to ensure that you will be able to make a knowledgeable real estate investment decision.